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©McGraw-Hill Companies, 2009

Solutions Manual, Chapter 2 55

Chapter 2 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: owner, capital and owner, withdrawals.

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. 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.

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.



Fundamental Accounting Principles, 19th Edition 56

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 owner’s equity, 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 Best Buy balance sheet include: Cash and cash equivalents; Short-term investments; Receivables; Merchandise inventories; Other current assets; Land and buildings; Leasehold improvements; Fixtures and equipment; Property under capital lease; Goodwill, Tradenames; Long-term investments; Other assets

Credit balance accounts on the Best Buy balance sheet include: Accounts payable; Unredeemed gift card liabilities; Accrued compensation and related expenses; Accrued liabilities; Accrued income taxes; Short-term debt; Current portion of long-term debt; Long-term liabilities; Long-term debt; Minority interests; Preferred stock; Common stock; Additional paid-in capital; Retained earnings; Accumulated other comprehensive income.

17. Circuit City calls the liability that is incurred due to the purchase of inventory “Merchandise payable.”

18. The asset account with receivable in its account title is Accounts and notes receivable, net. The liabilities with payable in their account titles are Accounts payable and Income taxes payable.

19. Apple’s revenue account is titled “Net Sales.”




QUICK STUDIES Quick Study 2-1 (5 minutes) The likely source documents include:

b. Telephone bill

c. Sales ticket

f. Invoice from supplier

h. Bank statement Quick Study 2-2 (10 minutes) a. I Income statement

b. E Statement of owner’s equity

c. B Balance sheet

d. B Balance sheet

e. B Balance sheet

f. I Income statement

g. B Balance sheet

h. B Balance sheet

i. B Balance sheet

Quick Study 2-3 (10 minutes) a. Debit d. Debit g. Credit b. Debit e. Debit h. Debit c. Credit f. Debit i. Credit Quick Study 2-4 (10 minutes) a. Debit e. Debit i. Credit b. Debit f. Credit j. Debit c. Credit g. Credit k. Debit d. Credit h. Debit l. Credit




Quick Study 2-5 (10 minutes) a. Debit e. Debit i. Credit b. Credit f. Credit j. Debit c. Debit g. Credit d. Credit h. Credit

Quick Study 2-6 (15 minutes) Jan.13 Cash .......................................................................... 80,000 Equipment ............................................................... 30,000 D. Tyler, Capital ............................................... 110,000 Owner invests cash and equipment. 21 Office Supplies ........................................................ 820 Accounts Payable ........................................... 820 Purchased office supplies on credit. 29 Cash .......................................................................... 8,700 Landscaping Services Revenue .................... 8,700 Received cash for landscaping services. 30 Cash .......................................................................... 4,000 Unearned Landscaping Services Revenue .. 4,000 Received cash in advance for landscaping services.

Quick Study 2-7 (10 minutes) The correct answer is c. Explanation: If a $2,250 debit to Rent Expense is incorrectly posted as a credit, the effect is to understate the Rent 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. I e. B i. B b. I f. I j. I c. I g. B k. E d. B h. B l. B




EXERCISES Exercise 2-1 (15 minutes) Type of Increase Normal Account Account (Dr. or Cr.) Balance

a. Owner Capital ............................. equity credit credit

b. Accounts Receivable ................. asset debit debit

c. Owner Withdrawals.................... equity debit debit

d. Cash ............................................ asset debit debit

e. Equipment .................................. asset debit debit

f. Fees Earned ................................ revenue credit credit

g. Wages Expense.......................... expense debit debit

h. Unearned Revenue .................... liability credit credit

i. Accounts Payable ...................... liability credit credit

j. Postage Expense ....................... expense debit debit

k. Prepaid Insurance ...................... asset debit debit

l. Land ............................................ asset debit debit

Exercise 2-2 (15 minutes) a. Beginning cash balance (debit) ...................................................... $ ?

Cash received in October (debits) ................................................. 104,750

Cash disbursed in October (credits) .............................................. (101,607)

Ending cash balance (debit) ........................................................... $ 17,069

Beginning cash balance (debit) ...................................................... $ 13,926

b. Beginning accounts receivable (debit) .......................................... $ 83,250

Sales on account in October (debits) ............................................ ?

Collections on account in October (credits) ................................. (75,924)

Ending accounts receivable (debit) ............................................... $ 85,830

Sales on account in October (debits) ............................................ $ 78,504

c. Beginning accounts payable (credit) ............................................. $148,000

Purchases on account in October (credits) .................................. 271,876

Payments on accounts in October (debits) ................................... ( ?)

Ending accounts payable (credit) .................................................. $137,492

Payments on accounts in October (debits) ................................... $282,384




Exercise 2-3 (15 minutes) The company would make the following entry (not required for answer): Cash .................................................................. 12,000 Computer Equipment ...................................... 90,000 Note Payable .............................................. 37,000 Services Revenue ...................................... 65,000 Accepted cash, equipment and note for services.

Thus, of the a through f items listed, the following effects should be included:

a. $37,000 increase in a liability account.

b. $12,000 increase in the Cash account.

e. $65,000 increase in a revenue account. Explanation: This transaction reflects $65,000 in revenue, which is the value of the service provided. Payment is received in the form of a $12,000 increase in cash, an $90,000 increase in computer equipment, and a $37,000 increase in its liabilities. The net value received by the company is $65,000. Exercise 2-4 (25 minutes) Aug. 1 Cash .................................................................. 14,250 Photography Equipment ................................. 61,275 M. Harris, Capital ....................................... 75,525 Owner investment in business.

2 Prepaid Insurance ............................................ 3,300 Cash ............................................................ 3,300 Acquired 24 months of insurance coverage.

5 Office Supplies ................................................. 2,707 Cash ............................................................ 2,707 Purchased office supplies.

20 Cash .................................................................. 3,250 Photography Fees Earned ........................ 3,250 Collected photography fees.

31 Utilities Expense .............................................. 871 Cash ............................................................ 871 Paid for August utilities.




Exercise 2-5 (30 minutes)

Cash Photography Equipment

Aug. 1 14,250 Aug. 2 3,300 Aug. 1 61,275 20 3,250 5 2,707

31 871 M. Harris, Capital

Balance 10,622 Aug. 1 75,525

Office Supplies Photography Fees Earned

Aug. 5 2,707 Aug. 20 3,250

Prepaid Insurance Utilities Expense

Aug. 2 3,300 Aug. 31 871

SPECIAL PICS Trial Balance

August 31 Debit Credit

Cash .......................................................................................... $10,622

Office supplies ......................................................................... 2,707

Prepaid insurance .................................................................... 3,300

Photography equipment .......................................................... 61,275

M. Harris, Capital ...................................................................... $75,525

Photography fees earned ........................................................ 3,250

Utilities expense ....................................................................... 871 _______

Totals ......................................................................................... $78,775 $78,775





Cash Accounts Payable

(a) 14,000 (b) 406 (e) 7,742 (c) 7,742

(d) 1,652 (e) 7,742 Balance 0 (h) 1,246 (g) 510 (i) 1,200

Balance 7,040 S. Amena, Capital

(a) 14,000

Balance 14,000

Accounts Receivable S. Amena, Withdrawals

(f) 2,968 (h) 1,246 (i) 1,200

Balance 1,722 Balance 1,200

Office Supplies Fees Earned

(b) 406 (d) 1,652

Balance 406 (f) 2,968

Balance 4,620

Office Equipment Rent Expense

(c) 7,742 (g) 510

Balance 7,742 Balance 510


AMENA COMPANY Trial Balance May 31, 2009

Debit Credit

Cash ................................................................................................. $ 7,040

Accounts receivable ....................................................................... 1,722

Office supplies ................................................................................ 406

Office equipment ............................................................................ 7,742

Accounts payable ........................................................................... $ 0

S. Amena, Capital ........................................................................... 14,000

S. Amena, Withdrawals .................................................................. 1,200

Fees earned ..................................................................................... 4,620

Rent expense .................................................................................. 510 ______

Totals ............................................................................................... $18,620 $18,620





Transactions that created expenses:

b. Salaries Expense ......................................... 1,233 Cash ....................................................... 1,233 Paid salary of receptionist.

d. Utilities Expense ......................................... 870 Cash ....................................................... 870 Paid utilities for the office.

[Note: Expenses are outflows or using up of assets (or the creation of liabilities) that occur in the process of providing goods or services to customers.]

Transactions a, c, and e are not expenses for the following reasons:

a. This transaction decreased assets in settlement of a previously existing liability, and equity did not change. Cash payment does not mean the same as using up of assets (expense was recorded when the supplies were used).

c. This transaction involves the purchase of an asset. The form of the company’s assets changed, but total assets did not change, and the equity did not decrease.

e. This transaction is a distribution of cash to the owner. Even though equity decreased, the decrease did not occur in the process of providing goods or services to customers.





Transactions that created revenues:

b. Accounts Receivable .......................................... 2,300 Services Revenue ......................................... 2,300 Provided services on credit.

c. Cash ..................................................................... 875 Services Revenue ......................................... 875 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).


TECH TALK Income Statement

For Month Ended October 31

Revenues

Consulting fees earned ......................... $25,620

Expenses

Salaries expense ................................... $12,405

Rent expense ......................................... 6,859

Telephone expense ............................... 560

Miscellaneous expenses ...................... 280

Total expenses ...................................... 20,104

Net income .................................................. $ 5,516





TECH TALK Statement of Owner’s Equity For Month Ended October 31

D. Shabazz, Capital, October 1 .................. $ 0

Add: Investments by owner .................... 124,114

Net income (from Exercise 2-10) ...... 5,516

129,630

Less: Withdrawals by owner .................... 2,000

D. Shabazz, Capital, October 31 ................ $127,630


TECH TALK Balance Sheet

October 31 Assets Liabilities

Cash ...............................$ 12,614 Accounts payable ................ $ 12,070

Accounts receivable .... 25,648

Office supplies .............. 4,903 Equity

Office equipment .......... 27,147 D. Shabazz, Capital ............. 127,630*

Land ............................... 69,388 .

Total assets ...................$139,700 Total liabilities & equity ...... $139,700

* Computation shown in Exercise 2-11.




Exercise 2-13 (20 minutes) a. Assets - Liabilities = Equity

Beginning of the year .......... $131,000 - $56,159 = $74,841 End of the year ..................... 180,000 - 72,900 = 107,100 Net increase in equity .......... $32,259

Net Income ............................ $ ?

Plus owner investments ...... 0

Less owner withdrawals ...... (0)

Change in equity .................. $32,259 Therefore, income must equal $32,259. b. Net income ................................................................................ $ ? Plus owner investments .......................................................... 0 Less owner withdrawals ($650/mo. x 12 mo.) ........................ (7,800)

Change in equity ...................................................................... $32,259 Therefore, net income must equal ($32,259 + $7,800) = $40,059 c. Net income ................................................................................ $ ? Plus owner investments .......................................................... 45,000 Less owner withdrawals .......................................................... (0)

Change in equity ...................................................................... $32,259 Therefore, the net loss must equal ($32,259 - $45,000) = $(12,741)

d. Net income ................................................................................ $ ? Plus owner investments .......................................................... 25,000 Less owner withdrawals ($650/mo. x 12 mo.) ........................ (7,800)

Change in equity ...................................................................... $32,259

Therefore, income must equal ($32,259+$7,800-$25,000)= $15,059




Exercise 2-14 (15 minutes) (a) (b) (c) (d)

Answers $(45,000) $64,665 $71,347 $(47,000)

Computations:

Equity, Dec. 31, 2008 .............. $ 0 $ 0 $ 0 $ 0

Owner investments ................ 112,500 64,665 85,347 201,871

Owner withdrawals ................. (45,000) (51,000) (8,000) (53,000)

Net income (loss) ................... 27,000 78,000 (6,000) (47,000)

Equity, Dec. 31, 2009 .............. $94,500 $91,665 $71,347 $101,871


a. Belle created a new business and invested $12,000 cash, $15,200 of equipment, and $24,000 in automobiles.

b. Paid $4,800 cash in advance for insurance coverage.

c. Paid $2,000 cash for office supplies.

d. Purchased $300 of office supplies and $9,700 of equipment on credit.

e. Received $9,000 cash for delivery services provided.

f. Paid $4,600 cash towards accounts payable.

g. Paid $820 cash for gas and oil expenses.





a. Cash ........................................................................... 12,000 Equipment ................................................................. 15,200 Automobiles .............................................................. 24,000 D. Belle, Capital ................................................. 51,200 Owner invested in business.

b. Prepaid Insurance ..................................................... 4,800 Cash .................................................................... 4,800 Purchased insurance coverage.

c. Office Supplies .......................................................... 2,000 Cash .................................................................... 2,000 Purchased supplies with cash.

d. Office Supplies .......................................................... 300 Equipment ................................................................. 9,700 Accounts Payable ............................................. 10,000 Purchased supplies and equipment on credit.

e. Cash ........................................................................... 9,000 Delivery Services Revenue ............................... 9,000 Received cash from customer.

f. Accounts Payable ..................................................... 4,600 Cash .................................................................... 4,600 Made payment on payables.

g. Gas and Oil Expense ................................................ 820 Cash .................................................................... 820 Paid for gas and oil.





Description

(1) Difference between Debit and

Credit Columns

(2)

Column with the Larger Total

(3)

Identify account(s) incorrectly

stated

(4)

Amount that account(s) is overstated or

understated

a. $1,870 debit to Rent Expense is posted as a $1,780 debit.

$90 credit Rent Expense Rent Expense is understated by $90

b. $3,560 credit to Cash is posted twice as two credits to Cash.

$3,560 credit Cash Cash is understated by $3,560

c. $7,120 debit to the Withdrawals account is debited to Owner’s Capital.

$0 ––

Owner, Capital

Owner, Withdrawals

Owner, Capital is understated by $7,120

Owner, Withdrawals is understated by $7,120

d. $1,630 debit to Prepaid Insurance is posted as a debit to Insurance Expense.

$0 ––

Prepaid Insurance

Insurance Expense

Prepaid Insurance is understated by $1,630

Insurance Expense is overstated by $1,630

e. $31,150 debit to Machinery is posted as a debit to Accounts Payable.

$0 ––

Machinery

Accounts Payable

Machinery is understated by $31,150

Accounts Payable is understated by $31,150

f. $4,460 credit to Services Revenue is posted as a $446 credit.

$4,014 debit Services Revenue

Services Revenue is understated by $4,014

g. $820 debit to Store Supplies is not posted.

$820 credit Store Supplies

Store Supplies is understated by $820





a. The debit column is correctly stated because the erroneous debit (to Accounts Payable) is deducted from an account with a (larger assumed) credit balance.

b. The credit column is understated by $22,500 because Accounts Payable was debited — it should have been credited.

c. The Office Equipment account balance is correctly stated.

d. The Accounts Payable account balance is understated by $22,500. It should have been increased (credited) by $11,250 but the posting error decreased (debited) it by $11,250.

e. The credit column is $22,500 less than the debit column, or $213,750 in total ($236,250 - $22,500).

Exercise 2-19 (15 minutes) a.

Co.

Liabilities /

Assets

=

Debt Ratio

Net Income

/

Average Assets

=

ROA

1 $56,000 $147,000 0.38 $21,000 $200,000 0.105

2 51,500 104,500 0.49 12,000 70,000 0.171

3 12,000 90,500 0.13 20,000 100,000 0.200

4 31,000 92,000 0.34 7,500 40,000 0.188

5 47,000 64,000 0.73 3,800 40,000 0.095

6 26,500 32,500 0.82 660 50,000 0.013 b. Company 6 relies most heavily on creditor (non-owner) financing with 82%

of its assets financed by liabilities.

c. Company 3 relies least on creditor (non-owner) financing at only 13%. This implies that 87% of the assets are financed by equity (owners).

d. The companies with the highest debt ratios indicate the greatest risk. The two companies with the highest debt ratios are 5 and 6.

e. Company 3 yields the highest return on assets at 20%; followed by Company 4 at 18.8%.

f. As an investor, one prefers high returns at low risk. Company 3 is the preferred investment since it yields the lowest risk (debt ratio is 13%) and highest return on assets (20%).




PROBLEM SET A

Problem 2-1A (90 minutes) Part 1 a. Cash............................................................. 101 195,000 Office Equipment ........................................ 163 8,200 Drafting Equipment .................................... 164 80,000 J. Lancet, Capital ................................ 301 283,200 Owner invested cash and equipment. b. Land ............................................................. 172 52,000 Cash ..................................................... 101 8,900 Note Payable ....................................... 250 43,100 Purchased land with cash and note payable. c. Building ....................................................... 170 55,000 Cash ..................................................... 101 55,000 Purchased building. d. Prepaid Insurance ...................................... 108 2,300 Cash ..................................................... 101 2,300 Purchased 18-month insurance policy. e. Cash............................................................. 101 6,600 Engineering Fees Earned .................. 402 6,600 Collected cash for completed work. f. Drafting Equipment .................................... 164 24,000 Cash ..................................................... 101 9,600 Note Payable ....................................... 250 14,400 Purchased equipment with cash and note

payable. g. Accounts Receivable ................................. 106 14,500 Engineering Fees Earned .................. 402 14,500 Completed services for client. h. Office Equipment ........................................ 163 1,100 Accounts Payable ............................... 201 1,100 Purchased equipment on credit.




Problem 2-1A (Part 1 Continued) i. Accounts Receivable ................................. 106 23,000 Engineering Fees Earned .................. 402 23,000 Billed client for completed work.

j. Equipment Rental Expense ....................... 602 1,410 Accounts Payable ............................... 201 1,410 Incurred equipment rental expense. k. Cash............................................................. 101 8,000 Accounts Receivable ......................... 106 8,000 Collected cash on account. l. Wages Expense .......................................... 601 2,500 Cash ..................................................... 101 2,500 Paid assistant’s wages.

m. Accounts Payable ...................................... 201 1,100

Cash .................................................. 101 1,100 Paid amount due on account.

n. Repairs Expense ........................................ 604 970

Cash .................................................. 101 970 Paid for repair of equipment.

o. J. Lancet, Withdrawals ............................... 302 10,450 Cash ..................................................... 101 10,450 Owner withdrew cash.

p. Wages Expense .......................................... 601 2,000 Cash ..................................................... 101 2,000 Paid assistant’s wages.

q. Advertising Expense .................................. 603 2,400 Cash ..................................................... 101 2,400 Paid for advertising expense.




Problem 2-1A (Continued) Part 2

Cash No. 101 Accounts Payable No. 201

Date PR Debit Credit Balance Date PR Debit Credit Balance

(a) 195,000 195,000 (h) 1,100 1,100 (b) 8,900 186,100 (j) 1,410 2,510 (c) 55,000 131,100 (m) 1,100 1,410 (d) 2,300 128,800

(e) 6,600 135,400 Notes Payable No. 250

(f) 9,600 125,800 Date PR Debit Credit Balance

(k) 8,000 133,800 (b) 43,100 43,100 (l) 2,500 131,300 (f) 14,400 57,500

(m) 1,100 130,200 (n) 970 129,230

(o) 10,450 118,780 J. Lancet, Capital No. 301

(p) 2,000 116,780 Date PR Debit Credit Balance

(q) 2,400 114,380 (a) 283,200 283,200

Accounts Receivable No. 106 J. Lancet, Withdrawals No. 302


(g) 14,500 14,500 (o) 10,450 10,450 (i) 23,000 37,500

(k) 8,000 29,500 Engineering Fees Earned No. 402

Date PR Debit Credit Balance Prepaid Insurance No. 108 (e) 6,600 6,600

Date PR Debit Credit Balance (g) 14,500 21,100

(d) 2,300 2,300 (i) 23,000 44,100

Office Equipment No. 163 Wages Expense No. 601


(a) 8,200 8,200 (l) 2,500 2,500 (h) 1,100 9,300 (p) 2,000 4,500

Drafting Equipment No. 164 Equipment Rental Expense No. 602


(a) 80,000 80,000 (j) 1,410 1,410 (f) 24,000 104,000

Building No. 170 Advertising Expense No. 603


(c) 55,000 55,000 (q) 2,400 2,400

Land No. 172 Repairs Expense No. 604


(b) 52,000 52,000 (n) 970 970




Problem 2-1A (Concluded) Part 3

LANCET ENGINEERING Trial Balance

June 30 Debit Credit

Cash ............................................................. $114,380

Accounts receivable .................................. 29,500

Prepaid insurance ...................................... 2,300

Office equipment ........................................ 9,300

Drafting equipment .................................... 104,000

Building ....................................................... 55,000

Land ............................................................. 52,000

Accounts payable ....................................... $ 1,410

Notes payable ............................................. 57,500

J. Lancet, Capital ........................................ 283,200

J. Lancet, Withdrawals ............................... 10,450

Engineering fees earned ............................ 44,100

Wages expense .......................................... 4,500

Equipment rental expense ......................... 1,410

Advertising expense .................................. 2,400

Repairs expense ......................................... 970

Totals ........................................................... $386,210 $386,210




Problem 2-2A (90 minutes) Part 1 Mar. 1 Cash............................................................. 101 180,000 Office Equipment ........................................ 163 30,000 D. Brooks, Capital ............................... 301 210,000 Owner invested cash and equipment. 2 Prepaid Rent ............................................... 131 8,000 Cash ..................................................... 101 8,000 Prepaid six months’ rent. 3 Office Equipment ........................................ 163 3,300 Office Supplies ........................................... 124 1,400 Accounts Payable ............................... 201 4,700 Purchased equipment and supplies on credit. 6 Cash............................................................. 101 6,000 Services Revenue ............................... 403 6,000 Received cash for services. 9 Accounts Receivable ................................. 106 9,200 Services Revenue ............................... 403 9,200 Billed client for completed work. 12 Accounts Payable ...................................... 201 4,700 Cash ..................................................... 101 4,700 Paid balance due on account. 19 Prepaid Insurance ...................................... 128 7,500 Cash ..................................................... 101 7,500 Paid premium for insurance. 22 Cash............................................................. 101 4,300 Accounts Receivable ......................... 106 4,300 Collected part of amount owed by client. 25 Accounts Receivable ................................. 106 3,590 Services Revenue ............................... 403 3,590 Billed client for completed work. 29 D. Brooks, Withdrawals ............................. 302 4,900 Cash ..................................................... 101 4,900 Owner withdrew cash. 30 Office Supplies ........................................... 124 1,700 Accounts Payable ............................... 201 1,700 Purchased supplies on account. 31 Utilities Expense ......................................... 690 500 Cash ..................................................... 101 500 Paid monthly utility bill.





Cash Acct. No. 101

Date Explanation PR Debit Credit Balance

Mar. 1 G1 180,000 180,000 2 G1 8,000 172,000 6 G1 6,000 178,000 12 G1 4,700 173,300 19 G1 7,500 165,800 22 G1 4,300 170,100 29 G1 4,900 165,200 31 G1 500 164,700

Accounts Receivable Acct. No. 106


Mar. 9 G1 9,200 9,200 22 G1 4,300 4,900 25 G1 3,590 8,490

Office Supplies Acct. No. 124


Mar. 3 G1 1,400 1,400 30 G1 1,700 3,100

Prepaid Insurance Acct. No. 128


Mar. 19 G1 7,500 7,500

Prepaid Rent Acct. No. 131


Mar. 2 G1 8,000 8,000

Office Equipment Acct. No. 163


Mar. 1 G1 30,000 30,000 3 G1 3,300 33,300




Problem 2-2A (Continued)

Accounts Payable Acct. No. 201


Mar. 3 G1 4,700 4,700 12 G1 4,700 0 30 G1 1,700 1,700

D. Brooks, Capital Acct. No. 301


Mar. 1 G1 210,000 210,000

D. Brooks, Withdrawals Acct. No. 302


Mar. 29 G1 4,900 4,900

Services Revenue Acct. No. 403


Mar. 6 G1 6,000 6,000 9 G1 9,200 15,200 25 G1 3,590 18,790

Utilities Expense Acct. No. 690


Mar. 31 G1 500 500




Problem 2-2A (Concluded)

Part 3

VENTURE CONSULTANTS Trial Balance

March 31 Debit Credit Cash ...................................................................... $164,700

Accounts receivable ............................................ 8,490

Office supplies ...................................................... 3,100

Prepaid insurance ................................................ 7,500

Prepaid rent .......................................................... 8,000

Office equipment .................................................. 33,300

Accounts payable ................................................. $ 1,700

D. Brooks, Capital .................................................. 210,000

D. Brooks, Withdrawals ......................................... 4,900

Services revenue .................................................. 18,790

Utilities expense ................................................... 500

Totals ..................................................................... $230,490 $230,490




Problem 2-3A (90 minutes) Part 1 April 1 Cash............................................................. 101 95,000 Office Equipment ........................................ 163 22,800 J. Lanelle, Capital ............................... 301 117,800 Owner invested cash and equipment. 2 Prepaid Rent ............................................... 131 7,200 Cash ..................................................... 101 7,200 Prepaid twelve months’ rent. 3 Office Equipment ........................................ 163 11,400 Office Supplies ........................................... 124 2,280 Accounts Payable ............................... 201 13,680 Purchased equip. & supplies on credit. 6 Cash............................................................. 101 2,000 Services Revenue ............................... 403 2,000 Received cash for services. 9 Accounts Receivable ................................. 106 7,600 Services Revenue ............................... 403 7,600 Billed client for completed work. 13 Accounts Payable ...................................... 201 13,680 Cash ..................................................... 101 13,680 Paid balance due on account. 19 Prepaid Insurance ...................................... 128 6,000 Cash ..................................................... 101 6,000 Paid premium for insurance. 22 Cash............................................................. 101 6,080 Accounts Receivable ......................... 106 6,080 Collected part of amount owed by client. 25 Accounts Receivable ................................. 106 2,640 Services Revenue ............................... 403 2,640 Billed client for completed work. 28 J. Lanelle, Withdrawals .............................. 302 6,200 Cash ..................................................... 101 6,200 Owner withdrew cash. 29 Office Supplies ........................................... 124 760 Accounts Payable ............................... 201 760 Purchased supplies on account. 30 Utilities Expense ......................................... 690 700 Cash ..................................................... 101 700 Paid monthly utility bill.





Cash Acct. No. 101


April 1 G1 95,000 95,000 2 G1 7,200 87,800 6 G1 2,000 89,800 13 G1 13,680 76,120 19 G1 6,000 70,120 22 G1 6,080 76,200 28 G1 6,200 70,000 30 G1 700 69,300



April 9 G1 7,600 7,600 22 G1 6,080 1,520 25 G1 2,640 4,160



April 3 G1 2,280 2,280 29 G1 760 3,040



April 19 G1 6,000 6,000



April 2 G1 7,200 7,200



April 1 G1 22,800 22,800 3 G1 11,400 34,200




Problem 2-3A (Continued)



April 3 G1 13,680 13,680 13 G1 13,680 0 29 G1 760 760

J. Lanelle, Capital Acct. No. 301


April 1 G1 117,800 117,800

J. Lanelle, Withdrawals Acct. No. 302


April 28 G1 6,200 6,200



April 6 G1 2,000 2,000 9 G1 7,600 9,600 25 G1 2,640 12,240



April 30 G1 700 700





VIVA CONSULTANTS Trial Balance

April 30 Debit Credit Cash ....................................................................... $ 69,300

Accounts receivable ............................................ 4,160

Office supplies ...................................................... 3,040

Prepaid insurance ................................................ 6,000

Prepaid rent .......................................................... 7,200

Office equipment .................................................. 34,200

Accounts payable ................................................. $ 760

J. Lanelle, Capital .................................................. 117,800

J. Lanelle, Withdrawals ......................................... 6,200

Services revenue .................................................. 12,240

Utilities expense ................................................... 700

Total ....................................................................... $130,800 $130,800




Problem 2-4A (60 minutes) Part 1

FAVIANA SHIPPING

Balance Sheet December 31, 2008

Assets Liabilities Cash ............................... $ 47,867 Accounts payable ................ $ 68,310 Accounts receivable .... 25,983 Office supplies .............. 4,098 Office equipment .......... 125,816 Equity Trucks ............................ 49,236 Total equity .......................... 184,690 Total assets ................... $253,000 Total liabilities and equity ... $253,000

FAVIANA SHIPPING Balance Sheet

December 31, 2009

Assets Liabilities Cash ............................... $ 8,154 Accounts payable ................. $ 33,879 Accounts receivable .... 20,370 Note payable .......................... 85,080 Office supplies .............. 3,002 Total liabilities ....................... 118,959 Office equipment .......... 134,018 Trucks ............................ 58,236 Building ......................... 164,124 Equity Land ............................... 40,956 Total equity ............................ 309,901 Total assets ................... $428,860 Total liabilities and equity .... $428,860

Part 2 Computation of 2009 net income:

Equity, December 31, 2008 ............................................................ $184,690

Equity, December 31, 2009 ............................................................ (309,901)

Increase in equity during 2009 ...................................................... $125,211

Owner investments ........................................................................ 34,000

Add net income .............................................................................. ?

Deduct owner withdrawals ($2,400 x 12) ..................................... (28,800)

Increase in equity during 2009 ...................................................... $125,211

Therefore, net income must equal ($125,211-$34,000+$28,800) = $120,011

Part 3

Debt Ratio = $118,959 / $428,860 = 27.7%





MIN ENGINEERING Trial Balance

May 31 Debit Credit

Cash ............................................................. $44,132 Office supplies ............................................ 1,090 Prepaid insurance ...................................... 4,700 Office equipment ........................................ 11,200 Accounts payable ....................................... $11,200 Y. Min, Capital .............................................. 18,000 Y. Min, Withdrawals ..................................... 4,328 Engineering fees earned ............................ 44,000 Rent expense .............................................. 7,750 . Totals ........................................................... $73,200 $73,200

Part 2: Likely transactions (following order of trial balance).

1. Purchased $1,090 of office supplies for cash.

2. Paid $4,700 insurance premium in advance.

3. Purchased $11,200 of office equipment on credit (with account payable).

4. Yi Min invested $18,000 cash in business.

5. Paid $4,328 cash for owner withdrawals.

6. Earned $44,000 cash for engineering services, all in cash.

7. Paid $7,750 cash for rent expense. Part 3

Report of Cash Received and Paid

Cash received Owner investments ................................... $18,000 Engineering fees ....................................... 44,000 Total cash received ................................... $62,000 Cash paid Office supplies ........................................... 1,090 Insurance premium ................................... 4,700 Owner withdrawals .................................... 4,328 Rent ............................................................ 7,750 Total cash paid .......................................... 17,868

Ending balance ............................................ $44,132





a. Cash............................................................. 101 82,000 Office Equipment ........................................ 163 22,000 A. Emitt, Capital ................................... 301 104,000 Owner invested cash and equipment. b. Land ............................................................. 172 40,000 Building ....................................................... 170 165,000 Cash ..................................................... 101 25,000 Notes Payable ..................................... 250 180,000 Purchased land and building with cash and

note payable. c. Office Supplies ........................................... 108 1,700 Accounts Payable ............................... 201 1,700 Purchased office supplies on account. d. Automobiles ................................................ 164 16,800 A. Emitt, Capital .................................. 301 16,800 Owner contributed automobile to business. e. Office Equipment ........................................ 163 5,900 Accounts Payable ............................... 201 5,900 Purchased office equipment on account. f. Salaries Expense ........................................ 601 1,500 Cash ..................................................... 101 1,500

Paid assistant’s salary. g. Cash............................................................. 101 7,600 Fees Earned ........................................ 402 7,600 Provided services for cash. h. Utilities Expense ......................................... 602 630 Cash ..................................................... 101 630 Paid cash for utilities.




Problem 2-6A (Part 1 Continued) i. Accounts Payable ...................................... 201 1,700 Cash ..................................................... 101 1,700 Paid cash on account.

j. Office Equipment ........................................ 163 20,200 Cash ..................................................... 101 20,200 Purchased new equipment with cash. k. Accounts Receivable ................................. 106 6,750 Fees Earned ........................................ 402 6,750 Provided services on account. l. Salaries Expense ........................................ 601 2,000 Cash ..................................................... 101 2,000 Paid assistant’s salary.

m. Cash............................................................. 101 4,000

Accounts Receivable ....................... 106 4,000 Received cash due on account.

n. A. Emitt, Withdrawals ................................. 302 2,900

Cash .................................................. 101 2,900 Owner withdrew cash.





Cash No. 101 Land No. 172


(a) 82,000 82,000 (b) 40,000 40,000 (b) 25,000 57,000

(f) 1,500 55,500 Accounts Payable No. 201

(g) 7,600 63,100 Date PR Debit Credit Balance

(h) 630 62,470 (c) 1,700 1,700 (i) 1,700 60,770 (e) 5,900 7,600 (j) 20,200 40,570 (i) 1,700 5,900 (l) 2,000 38,570

(m) 4,000 42,570 Notes Payable No. 250

(n) 2,900 39,670 Date PR Debit Credit Balance

(b) 180,000 180,000

Accounts Receivable No. 106

Date PR Debit Credit Balance

(k) 6,750 6,750 A. Emitt, Capital No. 301

(m) 4,000 2,750 Date PR Debit Credit Balance

(a) 104,000 104,000

Office Supplies No. 108 (d) 16,800 120,800


(c) 1,700 1,700

A. Emitt, Withdrawals No. 302

Office Equipment No. 163 Date PR Debit Credit Balance

Date PR Debit Credit Balance (n) 2,900 2,900

(a) 22,000 22,000

(e) 5,900 27,900 Fees Earned No. 402

(j) 20,200 48,100 Date PR Debit Credit Balance

(g) 7,600 7,600 (k) 6,750 14,350

Automobiles No. 164 Salaries Expense No. 601


(d) 16,800 16,800 (f) 1,500 1,500 (l) 2,000 3,500

Building No. 170

Date PR Debit Credit Balance Utilities Expense No. 602

(b) 165,000 165,000 Date PR Debit Credit Balance

(h) 630 630




Problem 2-6A (Concluded) Part 3

AE CONSULTING Trial Balance September 30

Debit Credit Cash ............................................................ $ 39,670


Office supplies ............................................ 1,700


Automobiles ................................................ 16,800

Building ....................................................... 165,000

Land ............................................................. 40,000


Notes payable ............................................. 180,000

A. Emitt, Capital ........................................... 120,800

A. Emitt, Withdrawals .................................. 2,900

Fees earned ................................................ 14,350

Salaries expense ........................................ 3,500

Utilities expense ......................................... 630

Total ............................................................. $321,050 $321,050




PROBLEM SET B Problem 2-1B (90 minutes) Part 1 a. Cash............................................................. 101 155,000 Office Equipment ........................................ 163 5,100 Computer Equipment ................................. 164 78,000 V. Wende, Capital ............................... 301 238,100 Owner invested cash and equipment. b. Land ............................................................. 172 55,000 Cash ..................................................... 101 8,700 Note Payable ....................................... 250 46,300 Purchased land with cash and note payable. c. Building ....................................................... 170 59,000 Cash ..................................................... 101 59,000 Purchased building. d. Prepaid Insurance ...................................... 108 3,500 Cash ..................................................... 101 3,500 Purchased 24-month insurance policy. e. Cash............................................................. 101 7,000 Fees Earned ........................................ 402 7,000 Collected cash for completed work. f. Computer Equipment ................................. 164 26,000 Cash ..................................................... 101 11,800 Note Payable ....................................... 250 14,200 Purchased equipment with cash and note

payable. g. Accounts Receivable ................................. 106 16,500 Fees Earned ........................................ 402 16,500 Completed services for client. h. Office Equipment ........................................ 163 1,800 Accounts Payable ............................... 201 1,800 Purchased equipment on credit.




Problem 2-1B (Part 1 Continued) i. Accounts Receivable ................................. 106 28,000 Fees Earned ........................................ 402 28,000 Billed client for completed work.

j. Computer Rental Expense ......................... 602 1,685 Accounts Payable ............................... 201 1,685 Incurred computer rental expense. k. Cash............................................................. 101 10,000 Accounts Receivable ......................... 106 10,000 Collected cash on account. l. Wages Expense .......................................... 601 1,300 Cash ..................................................... 101 1,300 Paid assistant’s wages.

m. Accounts Payable ...................................... 201 1,800

Cash .................................................. 101 1,800 Paid amount due on account.

n. Repairs Expense ........................................ 604 985

Cash .................................................. 101 985 Paid for repair of equipment.

o. V. Wende, Withdrawals .............................. 302 10,230 Cash ..................................................... 101 10,230 Owner withdrew cash.

p. Wages Expense .......................................... 601 1,300 Cash ..................................................... 101 1,300 Paid assistant’s wages.

q. Advertising Expense .................................. 603 4,300 Cash ..................................................... 101 4,300 Paid for advertising expense.




Problem 2-1B (Continued) Part 2

Cash No. 101 Accounts Payable No. 201


(a) 155,000 155,000 (h) 1,800 1,800 (b) 8,700 146,300 (j) 1,685 3,485 (c) 59,000 87,300 (m) 1,800 1,685 (d) 3,500 83,800

(e) 7,000 90,800 Notes Payable No. 250

(f) 11,800 79,000 Date PR Debit Credit Balance

(k) 10,000 89,000 (b) 46,300 46,300 (l) 1,300 87,700 (f) 14,200 60,500

(m) 1,800 85,900 (n) 985 84,915

(o) 10,230 74,685 V. Wende, Capital No. 301

(p) 1,300 73,385 Date PR Debit Credit Balance

(q) 4,300 69,085 (a) 238,100 238,100

Accounts Receivable No. 106 V. Wende, Withdrawals No. 302


(g) 16,500 16,500 (o) 10,230 10,230 (i) 28,000 44,500

(k) 10,000 34,500 Fees Earned No. 402

Date PR Debit Credit Balance Prepaid Insurance No. 108 (e) 7,000 7,000

Date PR Debit Credit Balance (g) 16,500 23,500

(d) 3,500 3,500 (i) 28,000 51,500

Office Equipment No. 163 Wages Expense No. 601


(a) 5,100 5,100 (l) 1,300 1,300 (h) 1,800 6,900 (p) 1,300 2,600

Computer Equipment No. 164 Computer Rental Expense No. 602


(a) 78,000 78,000 (j) 1,685 1,685 (f) 26,000 104,000

Building No. 170 Advertising Expense No. 603


(c) 59,000 59,000 (q) 4,300 4,300

Land No. 172 Repairs Expense No. 604


(b) 55,000 55,000 (n) 985 985




Problem 2-1B (Concluded) Part 3

SOFTWORKS Trial Balance

April 30 Debit Credit

Cash .............................................................. $ 69,085

Accounts receivable ..................................... 34,500

Prepaid insurance ......................................... 3,500

Office equipment........................................... 6,900

Computer equipment .................................... 104,000

Building .......................................................... 59,000

Land ............................................................... 55,000

Accounts payable ......................................... $ 1,685

Notes payable................................................ 60,500

V. Wende, Capital ........................................... 238,100

V. Wende, Withdrawals .................................. 10,230

Fees earned ................................................... 51,500

Wages expense ............................................. 2,600

Computer rental expense ............................. 1,685

Advertising expense ..................................... 4,300

Repairs expense ........................................... 985

Totals ............................................................. $351,785 $351,785




Problem 2-2B (90 minutes) Part 1 Nov. 1 Cash............................................................. 101 190,000 Office Equipment ........................................ 163 29,000 R. Kylan, Capital ................................. 301 219,000 Owner invested cash and equipment.. 2 Prepaid Rent ............................................... 131 10,000 Cash ..................................................... 101 10,000 Prepaid six months’ rent. 4 Office Equipment ........................................ 163 4,300 Office Supplies ........................................... 124 2,100 Accounts Payable ............................... 201 6,400 Purchased equipment and supplies on credit. 8 Cash............................................................. 101 7,000 Services Revenue ............................... 403 7,000 Received cash for services. 12 Accounts Receivable ................................. 106 9,200 Services Revenue ............................... 403 9,200 Billed client for completed work. 13 Accounts Payable ...................................... 201 6,400 Cash ..................................................... 101 6,400 Paid balance due on account. 19 Prepaid Insurance ...................................... 128 4,100 Cash ..................................................... 101 4,100 Paid premium for 24 months of insurance. 22 Cash............................................................. 101 3,700 Accounts Receivable ......................... 106 3,700 Collected part of amount owed by client. 24 Accounts Receivable ................................. 106 4,010 Services Revenue ............................... 403 4,010 Billed client for completed work. 28 R. Kylan, Withdrawals ................................ 302 6,300 Cash ..................................................... 101 6,300 Owner withdrew cash. 29 Office Supplies ........................................... 124 1,200 Accounts Payable ............................... 201 1,200 Purchased supplies on account. 30 Utilities Expense ......................................... 690 1,100 Cash ..................................................... 101 1,100 Paid monthly utility bill.





Cash Acct. No. 101


Nov. 1 G1 190,000 190,000 2 G1 10,000 180,000 8 G1 7,000 187,000 13 G1 6,400 180,600 19 G1 4,100 176,500 22 G1 3,700 180,200 28 G1 6,300 173,900 30 G1 1,100 172,800



Nov. 12 G1 9,200 9,200 22 G1 3,700 5,500 24 G1 4,010 9,510



Nov. 4 G1 2,100 2,100 29 G1 1,200 3,300



Nov. 19 G1 4,100 4,100



Nov. 2 G1 10,000 10,000



Nov. 1 G1 29,000 29,000 4 G1 4,300 33,300



Nov. 4 G1 6,400 6,400 13 G1 6,400 0 29 G1 1,200 1,200




Problem 2-2B (Continued)

R. Kylan, Capital Acct. No. 301


Nov. 1 G1 219,000 219,000

R. Kylan, Withdrawals Acct. No. 302


Nov. 28 G1 6,300 6,300



Nov. 8 G1 7,000 7,000 12 G1 9,200 16,200 24 G1 4,010 20,210



Nov. 30 G1 1,100 1,100 Part 3

KYLAN MANAGEMENT SERVICES Trial Balance November 30

Debit Credit

Cash .................................................................. $172,800

Accounts receivable ....................................... 9,510

Office supplies ................................................. 3,300

Prepaid insurance ........................................... 4,100

Prepaid rent ..................................................... 10,000

Office equipment ............................................. 33,300

Accounts payable ............................................ $ 1,200

R. Kylan, Capital ............................................... 219,000

R. Kylan, Withdrawals ...................................... 6,300

Services revenue ............................................. 20,210

Utilities expense .............................................. 1,100

Totals ................................................................ $240,410 $240,410




Problem 2-3B (90 minutes) Part 1 Sept. 1 Cash .......................................................... 101 130,000 Office Equipment ..................................... 163 31,200 J. Hassan, Capital ............................ 301 161,200 Owner invested in the business.

2 Prepaid Rent ............................................ 131 7,200 Cash .................................................. 101 7,200 Prepaid twelve months’ rent.

4 Office Equipment ..................................... 163 15,600 Office Supplies ........................................ 124 3,120 Accounts Payable ............................ 201 18,720 Purchased equipment and supplies on credit.

8 Cash .......................................................... 101 2,000 Service Fees Earned ........................ 401 2,000 Received cash for services.

12 Accounts Receivable .............................. 106 10,400 Service Fees Earned ........................ 401 10,400 Billed client for completed work.

13 Accounts Payable ................................... 201 18,720 Cash .................................................. 101 18,720 Paid balance due on account.

19 Prepaid Insurance ................................... 128 6,000 Cash .................................................. 101 6,000 Paid premium for insurance.

22 Cash .......................................................... 101 8,320 Accounts Receivable ....................... 106 8,320 Collected part of amount owed by client.

24 Accounts Receivable .............................. 106 2,640 Service Fees Earned ........................ 401 2,640 Billed client for completed work.

28 J. Hassan, Withdrawals .......................... 302 6,200 Cash .................................................. 101 6,200 Owner withdrew cash.

29 Office Supplies ........................................ 124 1,040 Accounts Payable ............................ 201 1,040 Purchased supplies on account.

30 Utilities Expense ...................................... 690 700 Cash .................................................. 101 700 Paid monthly utility bill.





Cash Acct. No. 101


Sept. 1 G1 130,000 130,000 2 G1 7,200 122,800 8 G1 2,000 124,800 13 G1 18,720 106,080 19 G1 6,000 100,080 22 G1 8,320 108,400 28 G1 6,200 102,200 30 G1 700 101,500



Sept. 12 G1 10,400 10,400 22 G1 8,320 2,080 24 G1 2,640 4,720



Sept. 4 G1 3,120 3,120 29 G1 1,040 4,160



Sept. 19 G1 6,000 6,000



Sept. 2 G1 7,200 7,200



Sept. 1 G1 31,200 31,200 4 G1 15,600 46,800




Problem 2-3B (Continued)



Sept. 4 G1 18,720 18,720 13 G1 18,720 0 29 G1 1,040 1,040

J. Hassan, Capital Acct. No. 301


Sept. 1 G1 161,200 161,200

J. Hassan, Withdrawals Acct. No. 302


Sept. 28 G1 6,200 6,200

Service Fees Earned Acct. No. 401


Sept. 8 G1 2,000 2,000 12 G1 10,400 12,400 24 G1 2,640 15,040 Utilities Expense Acct. No. 690


Sept. 30 G1 700 700





HASSAN MANAGEMENT SERVICES Trial Balance September 30

Debit Credit

Cash .................................................................. $101,500


Office supplies ................................................. 4,160


Prepaid rent ..................................................... 7,200


Accounts payable ............................................ $ 1,040

J. Hassan, Capital ............................................ 161,200

J. Hassan, Withdrawals .................................. 6,200

Service fees earned ......................................... 15,040

Utilities expense .............................................. 700 .

Totals ............................................................... $177,280 $177,280




Problem 2-4B (60 minutes) Part 1

TRINITY CO. Balance Sheet

December 31, 2008

Assets Liabilities Cash ................................... $ 54,773 Accounts payable ............................................................................ $ 78,165 Accounts receivable ......... 29,731 Office supplies .................. 4,689 Office equipment............... 143,968 Equity Machinery .......................... 56,339 Total equity ....................................................................................... 211,335 Total assets ....................... $289,500 Total liabilities & equity ................................................................... $289,500

TRINITY CO. Balance Sheet

December 31, 2009

Assets Liabilities Cash ................................... $ 10,629 Accounts payable ............................................................................ $ 38,767 Accounts receivable ......... 23,309 Note payable ..................................................................................... 114,666 Office supplies .................. 3,435 Total liabilities .................................................................................. 153,433 Office equipment............... 153,353 Machinery .......................... 65,339 Building .............................. 187,802 Equity Land ................................... 46,864 Total equity ....................................................................................... 337,298 Total assets ....................... $490,731 Total liabilities & equity ................................................................... $490,731

Part 2 Calculation of 2010 net income:

Equity, December 31, 2008 .......................................................... $211,335

Equity, December 31, 2009 .......................................................... (337,298)

Increase in equity during 2009 .................................................... $125,963

Owner investments during 2009 ................................................. $ 35,000

2009 Net income ........................................................................... ?

Owner withdrawals during 2009 ($4,000 x 12) ........................... (48,000)

Increase in equity during 2009 .................................................... $125,963

Therefore, 2009 income must equal ($125,963- 35,000+ $48,000) = $138,963 Part 3

Debt ratio = $153,433 / $490,731 = 31.3%




Problem 2-5B (35 minutes)

Part 1

GOULD SOLUTIONS Trial Balance

April 30 Debit Credit

Cash ...................................................................... $46,518 Office supplies ..................................................... 850 Prepaid rent ......................................................... 4,700 Office equipment ................................................. 11,300 Accounts payable ................................................. $11,300 R. Gould, Capital .................................................. 22,500 R. Gould, Withdrawals ......................................... 4,172 Consulting fees earned ....................................... 43,000 Operating expenses ............................................ 9,260 Totals ..................................................................... $76,800 $76,800

Part 2: Likely transactions (following order of trial balance).

1. Purchased $850 of office supplies for cash.

2. Paid $4,700 cash for prepaid rent.

3. Purchased $11,300 office equipment on credit.

4. Gould invested $22,500 cash in business.

5. Paid $4,172 cash for owner withdrawals.

6. Earned $43,000 cash in consulting fees.

7. Paid $9,260 cash for operating expenses. Part 3

Report of Cash Received and Paid

Cash received Owner investments .................................. $22,500 Consulting fees ........................................ 43,000 Total cash received .................................. $65,500 Cash paid Office supplies .......................................... 850 Prepaid rent .............................................. 4,700 Owner withdrawals ................................... 4,172 Operating expenses ................................. 9,260 Total cash paid ......................................... 18,982

Ending balance ........................................... $46,518




Problem 2-6B (90 minutes) Part 1

a. Cash............................................................. 101 82,000 Office Equipment ........................................ 163 23,000 D. Witter, Capital .................................. 301 105,000 Owner invested cash and equipment. b. Land ............................................................. 172 50,000 Building ....................................................... 170 165,000 Cash ..................................................... 101 30,000 Notes Payable ..................................... 250 185,000 Purchased land and building with cash and

note payable. c. Office Supplies ........................................... 108 2,200 Accounts Payable ............................... 201 2,200 Purchased office supplies on account. d. Automobiles ................................................ 164 16,800 D. Witter, Capital ................................. 301 16,800 Owner contributed automobile to business. e. Office Equipment ........................................ 163 5,100 Accounts Payable ............................... 201 5,100 Purchased office equipment on account. f. Salaries Expense ........................................ 601 1,500 Cash ..................................................... 101 1,500 Paid assistant’s salary. g. Cash............................................................. 101 8,000 Fees Earned ........................................ 402 8,000 Provided services for cash. h. Utilities Expense ......................................... 602 630 Cash ..................................................... 101 630 Paid cash for utilities.




Problem 2-6B (Part 1 Continued) i. Accounts Payable ...................................... 201 2,200 Cash ..................................................... 101 2,200 Paid cash on account.

j. Office Equipment ........................................ 163 20,400 Cash ..................................................... 101 20,400 Purchased equipment for cash. k. Accounts Receivable ................................. 106 6,500 Fees Earned ........................................ 402 6,500 Provided services on account. l. Salaries Expense ........................................ 601 2,000 Cash ..................................................... 101 2,000 Paid assistant’s salary.

m. Cash............................................................. 101 4,000 Accounts Receivable ......................... 106 4,000 Received cash due on account.

n. D. Witter, Withdrawals ............................... 302 2,700 Cash ..................................................... 101 2,700 Owner withdrew cash.





Cash No. 101 Land No. 172


(a) 82,000 82,000 (b) 50,000 50,000 (b) 30,000 52,000

(f) 1,500 50,500 Accounts Payable No. 201

(g) 8,000 58,500 Date PR Debit Credit Balance

(h) 630 57,870 (c) 2,200 2,200 (i) 2,200 55,670 (e) 5,100 7,300 (j) 20,400 35,270 (i) 2,200 5,100 (l) 2,000 33,270

(m) 4,000 37,270 Notes Payable No. 250

(n) 2,700 34,570 Date PR Debit Credit Balance

(b) 185,000 185,000

Accounts Receivable No. 106


(k) 6,500 6,500 D. Witter, Capital No. 301

(m) 4,000 2,500 Date PR Debit Credit Balance

(a) 105,000 105,000

Office Supplies No. 108 (d) 16,800 121,800


(c) 2,200 2,200

D. Witter, Withdrawals No. 302

Office Equipment No. 163 Date PR Debit Credit Balance

Date PR Debit Credit Balance (n) 2,700 2,700

(a) 23,000 23,000

(e) 5,100 28,100 Fees Earned No. 402

(j) 20,400 48,500 Date PR Debit Credit Balance

(g) 8,000 8,000 (k) 6,500 14,500

Automobiles No. 164 Salaries Expense No. 601


(d) 16,800 16,800 (f) 1,500 1,500 (l) 2,000 3,500

Building No. 170

Date PR Debit Credit Balance Utilities Expense No. 602

(b) 165,000 165,000 Date PR Debit Credit Balance

(h) 630 630





WITTER CONSULTING Trial Balance

June 30 Debit Credit

Cash ............................................................ $ 34,570


Office supplies ............................................ 2,200


Automobiles ................................................ 16,800

Building ....................................................... 165,000

Land ............................................................. 50,000


Notes payable ............................................. 185,000

D. Witter, Capital .......................................... 121,800

D. Witter, Withdrawals ................................. 2,700

Fees earned ................................................ 14,500

Salaries expense ........................................ 3,500

Utilities expense ......................................... 630

Total ............................................................. $326,400 $326,400




Serial Problem — SP 2

Part 1 (120 minutes)

2009

Oct. 1 Cash .......................................................... 101 55,000 Office Equipment ..................................... 163 8,000 Computer Equipment .............................. 167 20,000 A. Lopez, Capital .............................. 301 83,000 Owner invests cash and equipment.

2 Prepaid Rent ............................................ 131 3,300 Cash .................................................. 101 3,300 Paid four months’ rent in advance.

3 Computer Supplies ................................. 126 1,420 Accounts Payable ............................ 201 1,420 Purchased supplies on credit.

5 Prepaid Insurance ................................... 128 2,220 Cash .................................................. 101 2,220 Paid 12 months’ premium in advance.

6 Accounts Receivable ............................. 106 4,800 Computer Services Revenue .......... 403 4,800 Billed customer for services.

8 Accounts Payable .................................. 201 1,420 Cash .................................................. 101 1,420 Paid balance due on account payable.

10 No entry necessary in the journal.

12 Accounts Receivable ............................. 106 1,400 Computer Services Revenue .......... 403 1,400 Billed customer for services.

15 Cash .......................................................... 101 4,800 Accounts Receivable ...................... 106 4,800 Collected accounts receivable.

17 Repairs Expense—Computer ................. 684 805 Cash .................................................. 101 805 Paid for computer repairs.

20 Advertising Expense ............................... 655 1,940 Cash .................................................. 101 1,940 Purchased ad in local newspaper.

22 Cash .......................................................... 101 1,400 Accounts Receivable ...................... 106 1,400 Collected accounts receivable.




Serial Problem, Success Systems (Continued)

28 Accounts Receivable ............................. 106 5,208 Computer Services Revenue ......... 403 5,208 Billed customer for services.

31 Wages Expense ....................................... 623 875 Cash ................................................. 101 875 Paid employee for part-time work.

31 A. Lopez, Withdrawals ............................ 302 3,600 Cash ................................................. 101 3,600 Owner withdrew cash.

Nov. 1 Mileage Expense ..................................... 676 320 Cash ................................................. 101 320 Reimbursed Lopez for mileage.

2 Cash .......................................................... 101 4,633 Computer Services Revenue .......... 403 4,633 Collected cash revenue from client.

5 Computer Supplies ................................. 126 1,125 Cash ................................................. 101 1,125 Purchased computer supplies for cash.

8 Accounts Receivable ............................. 106 5,668 Computer Services Revenue ......... 403 5,668 Billed customer for services.

13 No entry necessary. (No revenue recognized until work performed.)

18 Cash .......................................................... 101 2,208 Accounts Receivable ....................... 106 2,208 Collected accounts receivable.

22 Miscellaneous Expenses ........................ 677 250 Cash .................................................. 101 250 Record donation. (Some companies use a Donations account.)

24 Accounts Receivable .............................. 106 3,950 Computer Services Revenue .......... 403 3,950 Billed customer for services.

25 No entry necessary.

28 Mileage Expense ..................................... 676 384 Cash .................................................. 101 384 Reimbursed Lopez for mileage.

30 Wages Expense ....................................... 623 1,750 Cash .................................................. 101 1,750 Paid employee for part-time work.

30 A. Lopez, Withdrawals ............................ 302 2,000 Cash .................................................. 101 2,000 Owner withdrew cash.




Serial Problem, Success Systems (Continued) Part 2

General Ledger accounts

Cash Acct. No. 101


Oct. 1 55,000 55,000 2 3,300 51,700 5 2,220 49,480 8 1,420 48,060 15 4,800 52,860 17 805 52,055 20 1,940 50,115 22 1,400 51,515 31 875 50,640 31 3,600 47,040 Nov. 1 320 46,720 2 4,633 51,353 5 1,125 50,228 18 2,208 52,436 22 250 52,186 28 384 51,802 30 1,750 50,052 30 2,000 48,052

Accounts Receivable Acct. No.106


Oct. 6 4,800 4,800 12 1,400 6,200 15 4,800 1,400 22 1,400 0 28 5,208 5,208 Nov. 8 5,668 10,876 18 2,208 8,668 24 3,950 12,618

Computer Supplies Acct. No. 126


Oct. 3 1,420 1,420 Nov. 5 1,125 2,545




Serial Problem, Success Systems (Continued)



Oct. 5 2,220 2,220



Oct. 2 3,300 3,300



Oct. 1 8,000 8,000

Computer Equipment Acct. No. 167


Oct. 1 20,000 20,000



Oct. 3 1,420 1,420 8 1,420 0

A. Lopez, Capital Acct. No. 301


Oct. 1 83,000 83,000

A. Lopez, Withdrawals Acct. No. 302


Oct. 31 3,600 3,600 Nov. 30 2,000 5,600




Serial Problem, Success Systems (Concluded)

Computer Services Revenue Acct. No. 403


Oct. 6 4,800 4,800 12 1,400 6,200 28 5,208 11,408 Nov. 2 4,633 16,041 8 5,668 21,709 24 3,950 25,659

Wages Expense Acct. No. 623


Oct. 31 875 875 Nov. 30 1,750 2,625

Advertising Expense Acct. No. 655


Oct. 20 1,940 1,940

Mileage Expense Acct. No. 676


Nov. 1 320 320 28 384 704

Miscellaneous Expenses Acct. No. 677


Nov. 22 250 250

Repairs Expense—Computer Acct. No. 684


Oct. 17 805 805




Serial Problem, Success Systems (Continued) Part 3

SUCCESS SYSTEMS Trial Balance November 30

Debit Credit

Cash .................................................................. $ 48,052


Computer supplies .......................................... 2,545


Prepaid rent ..................................................... 3,300


Computer equipment ...................................... 20,000

Accounts payable ............................................ $ 0

A. Lopez, Capital ............................................. 83,000

A. Lopez, Withdrawals .................................... 5,600

Computer services revenue ........................... 25,659

Wages expense ............................................... 2,625

Advertising expense ....................................... 1,940

Mileage expense .............................................. 704

Miscellaneous expense .................................. 250

Repairs expense—Computer ......................... 805

Totals ................................................................ $108,659 $108,659




Reporting in Action — BTN 2-1

1. Best Buy reports $6,607,000,000 in liabilities for the fiscal year ended February 25, 2006, and $7,369,000,000 for fiscal year ended March 3, 2007.

2. Best Buy reports $11,864,000,000 in assets for fiscal year ended February 25, 2006, and $13,570,000,000 for fiscal year ended March 3, 2007.

3. Year ended February 25, 2006 Debt Ratio = $6,607 / $11,864 = 55.7%

Year ended March 3, 2007 Debt Ratio = $7,369 / $13,570 = 54.3%

4. Best Buy employed slightly less financial leverage in the year ended March 3, 2007. In the year ended February 25, 2006, 55.7% of its assets were financed by debt. In 2007, only 54.3% of its assets were financed by debt.

5. Solution depends on the financial statements accessed.

Comparative Analysis — BTN 2-2 1. Best Buy Current year debt ratio: $7,369 /$13,570 = 54.3% Prior year debt ratio: $6,607 /$11,864 = 55.7% 2. Circuit City Current year debt ratio: $2,216 / $4,007 = 55.3% Prior year debt ratio: $2,114 / $4,069 = 52.0% 3. RadioShack Current year debt ratio: $1,416 / $2,070 = 68.4% Prior year debt ratio: $1,616 / $2,205 = 73.3%




Problem BTN 2-2 (Concluded) 4. RadioShack has the highest degree of financial leverage of the three

companies. RadioShack’s debt ratio is markedly higher (68.4% vs. 54.3% or 55.3%) than that of both Best Buy and Circuit City. This indicates that RadioShack carries more debt financing than the other two companies. This also implies that RadioShack is trying to use non-owner financing to make more money for its owners. This is fine provided RadioShack’s return does not decline below that of what it pays non-owners for use of their money— this is the main source of risk.

Ethics Challenge — BTN 2-3 This case involves a conflict between the need for efficiency and the need for control. While it makes sense to take and process lunch orders quickly, this efficiency is being accomplished by a shortcut that greatly weakens control over cash receipts. Cash could be received and lost or stolen because there would be no initial record of how much was received. The assistant manager’s explanation about the head manager not arriving until 3 o’clock suggests that the head manager doesn’t know about the proposed shortcut. Thus, the new employee is faced with the dilemma of deciding whether to accept the assistant manager’s instructions, suggest to the assistant manager that the shortcut seems wrong, or to ask the head manager to confirm the instructions. Each of these alternatives involves personal risk. It is possible that the assistant manager does not understand the potential for fraud and abuse if this shortcut is used. If the relationship between you and the assistant manager is such that you feel you can do so, you should explain your understanding of how the shortcut could lead to the problems of inaccurate records for tax purposes, gathering inaccurate marketing information, and abuse by other employees who might not be as honest as you and the assistant manager. If the assistant manager insists, you may want to work as instructed to get an idea of whether the shortcut is being abused by the assistant manager and perhaps to find out discreetly whether the head manager knows about it. (Although, this behavior does involve personal risk of perceived collusion with the assistant manager.) If you conclude that the assistant manager is committing fraud, you should report the situation to the head manager as quickly as possible.




Communicating in Practice — BTN 2-4

MEMORANDUM

To: Mora Stanley From: Subject: Financial statements explanation Date:

The four major financial statements and their purposes are:

Income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time. It helps explain how equity changes during a period due to earnings activities.

Statement of owner’s equity explains changes in equity due to net income (or net loss) and any withdrawals over a period of time.

Statement of cash flows identifies cash inflows (receipts) and outflows (payments) over a period of time. It also explains how the cash balance on the balance sheet changed from the beginning to the end of a period.

Balance sheet describes a company’s financial position (assets, liabilities, and equity) at a point in time.

These financial statements are linked to each other across time. Specifically, a balance sheet reports an organization’s financial position at a point in time. The income statement, statement of owner’s equity, and statement of cash flows report on performance over a period of time. These three statements link balance sheets from the beginning to the end of a reporting period. That is, they explain how the financial position of an organization changes from one point to another.




Taking It to the Net — BTN 2-5 1. The fiscal years’ net income or (loss) for Amazon are: 2006 = $190,000,000 2005 = $359,000,000 2004 = $588,000,000 2. In each of the three years net cash is provided by operations as follows:

2006 = $702,000,000 2005 = $733,000,000 2004 = $566,000,000 3. In 2005, Amazon had a net income of $359,000,000; and, in that same

year, cash decreased by $290,000,000.

The reason its cash balance decreased in 2005 was because its financing and investing activities both used cash, and this use of cash exceeded the cash provided by its operating activities. A large part of those cash outflows was tied to Amazon’s investments in securities.

Teamwork in Action — BTN 2-6

<Instructor note: There is no specific solution to this activity.> The following sample solution gives a summary outline of what a minimum report needs to include. Assume a team member selects assets:

Category: Assets a. Increases (decreases) in assets are debits (credits) to asset accounts.

Debit means left side, credit means right side. The normal side of an account refers to the side where increases are recorded. For assets, this is the debit, or left, side.

b. Owner investment of $10,000 cash in business. c. Assets = Liabilities + Owner, Capital – Withdrawals + Revenues – Expenses

+ $10,000 = $0 + $10,000 – $0 + $0 – $0 Owner investments have no effect on the income statement, but they do increase the cash flows from financing by $10,000 on the statement of cash flows (this increases its net cash flow).

d. Paid rent expense with $2,000 cash. e. Assets = Liabilities + Owner, Capital – Withdrawals + Revenues – Expenses

- $2,000 = $0 + $0 – $0 + $0 – $2,000 An expense paid in cash will decrease net income on the income statement and decrease operating cash flows on the statement of cash flows.




Entrepreneurial Decision — BTN 2-7

1.

FENDER MUSIC SERVICES Balance Sheet

December 31, 2009

Assets Liabilities Cash .................................... $ 3,600 Accounts payable ................... $ 2,200 Accounts receivable ........ 9,600 Unearned lesson fees ........... 15,600 Prepaid insurance ............. 1,500 Total liabilities ........................ 17,800 Prepaid rent ....................... 9,400 Store supplies .................... 6,600 Equity Equipment ......................... 50,000 Total equity ............................. 62,900 Total assets ........................ $80,700 Total liabilities and equity ..... $80,700

2. Debt ratio = Total liabilities / Total assets = $17,800 / $80,700 = 22%

Return on assets = Net income/Average assets = $40,000/$80,700* = 50% *Ending balance is used per instructions.

3. The prospects of a bank loan are likely to be good. (i) The debt ratio

indicates that 78% of the company’s funding is from equity. Also, there are no debt obligations requiring periodic payments. This implies low risk. (ii) The level of return on assets is very high. This implies good return.

Overall, given the information and the assumption that current

performance will continue into the future, the prospects of a bank loan are good.

Note: The loan does carry some risk—fueling this risk are (i) poor

recordkeeping, (ii) lack of information on growth potential, and (iii) a much higher pro forma debt ratio—that is, if the loan is granted, the debt ratio will jump to 43%, computed as:

($17,800 + $30,000) / ($80,700 + $30,000).




Entrepreneurial Decision — BTN 2-8

There are several issues that Sara Blakely should consider. If she chooses to contribute her own funds for the expansion, she will be risking her own savings, but she will not have the expense of interest payments, nor will she have the risk of the inability to repay her loan. If she chooses to borrow, she will have interest and loan payments to make, and she will have more risk (as reflected in her company’s debt ratio). If she can pay the interest and loan payments, it can be to her advantage to borrow, as long as her return on assets is high enough (that is, higher than the rate of interest on the borrowings).

Hitting the Road — BTN 2-9 Findings will vary. It is advisable that the instructor obtain a few classified sections from newspapers that were published over the period of the assignment. If student reports lack responses for question 2, it is informative and motivating to bring these (accounting-related job opportunities) sections to class when discussing or returning student reports as many students are not accounting majors.

Global Decision — BTN 2-10

1. An analysis of return on assets suggests that Best Buy (10.8%) yields the greatest return on assets, while RadioShack (3.4%) yields the lowest return.

2. An analysis of the debt ratio suggests that RadioShack (68.4%) presents the greatest risk, while Best Buy (54.3%) presents the least risk. DSG’s debt ratio is only slightly lower than RadioShack, so it’s risk is comparable to RadioShack’s.

3. In this case, Best Buy would appear to have some consideration for additional investment. Best Buy has the highest profitability, and has the lowest risk level of the three. DSG has a higher return on assets than RadioShack’s, but its risk level is comparable to RadioShack’s.

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