Problem 3-1 Analyzing transactions and Their Effects on Account Balances

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1 Chapter 3 Problems Problem 3-1 Analyzing transactions and Their Effects on Account Balances In May 20x5, Sue Smith organized a corporation to provide home and apartment cleaning services. The company, called Sue s Cleaning, Inc., began operations immediately. Transactions during the month of May were as follows: May 2 The corporation issued 50,000 shares of capital stock to Sue Smith in exchange for $100,000 cash. May 4 Purchased a truck for $30,000. Made a $10,000 cash down payment and issued a note payable for the remaining balance. May 5 Paid $1,500 to rent office space for the month. May 9 Billed customers $11,500 for services performed for the first half of May. May 10 Paid $4,800 in salaries earned by employees during the first half of May. May 19 Paid David s Auto Shop $400 for maintenance and repair services on the company truck. May 20 Collected $6,400 of the amounts billed to customers on May 9. May 28 Billed customers $14,200 for services performed during the second half of the month. May 30 Paid $10,200 in salaries earned by employees during the second half of the month. May 30 Received a $220 bill from ABC Supplies for cleaning supplies purchased and used in May. The entire amount is due by June 30. May 30 Declared a $1,400 dividend payable on June 22. May 31 Made a partial payment of $110 for the amount owed to ABC Supplies from the second May 30 entry. The account titles used by Sue s Cleaning are: Cash Retained Earnings Accounts Receivable Dividends Truck Service Revenue Notes Payable Maintenance Expense Accounts Payable Supplies Expense Dividends Payable Salaries Expense Capital Stock Rent Expense Instructions Prepare an analysis of each of the above transactions which shows which accounts will change as a result of each transaction. The May 2 transaction serves as an example of the form of analysis to be used. May 2 - Cash has been invested in the business therefore the asset Cash was increased by $100,000. Capital Stock has been issued to the owner, Sue Smith. Increases in ownership investment are recorded by increasing the Capital Stock account by $100,000. Summary for this entry: Cash +$100,000, Capital Stock +$100,000

2 Chapter 3 Problems Problem 3-2 Analyzing transactions and Their Effects on Account Balances Sid Simon, CPA opened an accounting and tax practice on September 1. The business transactions for September are shown below: Sept. 1 Simon invested $400,000 cash in the business in exchange for 2,000 shares of capital stock. Sept. 4 Land and a building were purchased for $220,000. Of this amount, $100,000 applied to the land, and $120,000 to the building. A cash payment of $80,000 was made at the time of the purchase, and a note payable was issued for the remaining balance. Sept. 9 Computers were purchased for $14,000 cash. Sept. 16 Office fixtures and equipment were purchased for $50,000. Simon paid $10,000 at the time of purchase and agreed to pay the entire remaining balance in 15 days. Sept. 21 Office supplies expected to last several months were purchased for $2,000 cash. Sept. 24 Simon billed clients $3,400 for services rendered. Of this amount, $1,200 was received in cash, and $2,200 was billed on account (due in 30 days). Sept. 27 A $500 invoice was received for several newspaper advertisements placed in September. The entire amount is due on October 8. Sept. 28 Received a $700 payment on the $2,200 account receivable recorded September 24. Sept. 31 Paid employees $2,400 for salaries earned in September. A partial list of account titles used by Simon includes: Cash Notes Payable Accounts Receivable Account Payable Office Supplies Capital Stock Computers Service Revenue Office Fixtures and Equipment Advertising Expense Land Salary Expense Building Instructions Prepare an analysis of each of the above transactions which shows which accounts will change a result of each transaction. The September 1 transaction serves as an example of the form of analysis to be used. September 1 - Cash has been invested in the business therefore the asset Cash was increased by $400,000. Capital Stock has been issued to the owner, Sid Simon. Increases in ownership investment are recorded by increasing the Capital Stock account by $400,000. Summary for this entry: Cash +$400,000, Capital Stock +$400,000

3 Chapter 3 Problems Problem 3-3 Journalizing Transactions, Posting to the Ledger, and Preparing a Trial Balance Sean Bean is the founder and president of O.C. Consulting, a financial planning company that gives investment advice to its clients. The business transactions during March while the company was being organized are listed below. March 1 Bean and several others invested $1,000,000 cash in the business in exchange for 20,000 shares of capital stock. March 6 The company purchased office space for $440,000, of which $180,000 was applicable to the land, and $260,000 to the building. A cash payment of $150,000 was made and a note payable was issued for the balance of the purchase price. March 10 Computer equipment was purchased from CompAmerica for $14,000 cash. March 12 Office furnishings were purchased from The Furniture Barn at a cost of $12,000. A $4,000 cash payment was made at the time of purchase, and an agreement was made to pay another $4,000 on March 28 and the remaining balance on July 1. The Furniture Barn did not require that O.C. Consulting sign a promissory note. March 20 Office supplies were purchased from Office Online for $1,800 cash. March 25 O.C. Consulting billed customers for consulting services provided in March for $44,000. March 26 The company mailed The Furniture Barn the first installment of $4,000 due on the account payable for office furnishings purchased on March 12. March 27 The company received and paid the following bills for the month of March: utilities $2,400 and telephone $260. March 28 The company paid $8,400 for employees salaries in March. March 29 Received $22,000 from customers in partial settlement of the account receivable created on March 25. Instructions (a) Prepare journal entries to record the above transactions. Select the appropriate account titles from the following chart of accounts: Cash Land Accounts Receivable Building Office Supplies Notes Payable Office Furnishings Accounts Payable Computer Systems Capital Stock Consulting Fees Earned Utilities Expense Telephone Expense Salaries Expense (b) Post the journal entry for each transaction to the appropriate ledger accounts. (c) Prepared a trial balance dated March 31, 20x5.

4 Chapter 3 Problems Problem Journalizing Transactions, Posting to the Ledger, and Preparing a Trial Balance John Swifty organized a corporation to provide plumbing services. The company, called Swifty Plumbing, Inc., began operations in April 20x5. Transactions during the month of April were as follows: April 1 The corporation issued 40,000 shares of capital stock to John Swifty in exchange for $80,000 cash. April 5 Purchased a truck for $44,000. Made a $12,000 cash down payment and issued a note payable for the remaining balance. April 7 Paid West Office Park $1,800 to rent office space for the month. April 9 Billed customers $12,000 for plumbing services for the first half of April. April 10 Paid $6,400 in salaries earned by employees during the first half of April. April 14 Paid Fred s Auto $1,200 for maintenance and repair services on the company truck. April 16 Collected $4,200 of the amounts billed to customers on April 9. April 28 Billed customers $14,400 for services performed during the second half of the month. April 30 Paid $6,400 in salaries earned by employees during the second half of the month. April 30 Received a $1,200 bill from Pete s Petroleum for fuel purchased and used in April. The entire amount is due by May 20. April 30 Declared a $1,000 dividend payable on May 20. Instructions (a) Prepare journal entries to record the above transactions. Select the appropriate account titles from the following chart of accounts: Cash Retained Earnings Accounts Receivable Dividends Truck Service Revenue Notes Payable Maintenance & Repair Expense Accounts Payable Fuel Expense Dividends Payable Salaries Expense Capital Stock Rent Expense (b) Post each transaction to the appropriate ledger accounts. (c) Prepared a trial balance dated April 30, 20x5.

5 Chapter 3 Problems Problem 3-5 Analyze the effects of transactions on the six components of the financial statements Dr. Evan Proudfoot opened the Proudfoot Foot Care, Inc. for the treatment of foot problems. The business transactions for January are as follows: Jan. 2 Dr. Proudfoot invested $440,000 cash in the business in exchange for 10,000 shares of capital stock. Jan. 6 Land and a building were purchased for $240,000. The cost of the land was $100,000 and the cost of the building was $140,000. A cash down payment of $80,000 was made at the time of purchase. Proudfoot signed a promissory note for the remaining amount. Jan. 8 Medical equipment was purchased for $35,000 cash. Jan. 15 Office furniture was purchased for $22,000. Proudfoot paid $12,000 at the time of the purchase. The balance was due on open account in 30 days. Jan. 21 Dr. Proudfoot medical services in the amount of $4,800. He received $2,200 in cash, and $2,600 was billed on account (due in 30 days). Jan. 29 A $1,200 bill was received for advertising expense incurred in January. The amount is due on February 14. Jan. 31 Paid employees $3,200 for salaries earned in January. Instructions: Analyze the effects that each transaction will have on the following six components of the financial statements for January. Use the format in the grid below. Use I for increase, D for decrease, NE for no effect. The January 2 transaction is provided as an example. (Note: If a transaction has more than on effect on one of the components below list the net effect. For example, if a transaction increased one asset by $20,000 and decreased another asset by $8,000 its net effect on assets would be an increase (I)). Income Statement Balance Sheet Transaction Net Stockholder's Date Revenues - Expenses = Income Assets = Liabilities + Equity Jan. 2 NE NE NE I NE I

6 Chapter 3 Problems Problem 3-6 Using a Trial Balance to Prepare an Income Statement and Balance Sheet In June 20x5, Jack Jones organized a corporation to prepare income tax returns for individuals and small corporations. The company, called Jack s Tax Service, began operations immediately. Following is the Trial Balance for Jack s Tax Service at the end of its first month of business: Jack's Tax Service Trial Balance June 30, 20x5 Debit Credit Cash $ 588,400 Accounts Receivable 24,000 Marketable Securities 20,000 Office Equipment 10,000 Land 120,000 Building 200,000 Service Revenue 200,000 Salaries Expense 34,000 Telephone Expense 2,000 Insurance Expense 2,400 Utilities Expense 1,200 Accounts Payable 22,000 Notes Payable 40,000 Retained Earnings - Capital Stock 740,000 Total $ 1,002,000 $ 1,002,000 Instructions Use the data above to prepare an income statement for Jack s Tax Service for the month of June 20x5 and a balance sheet at June 30, 20x5. Hint: Since Jack s Tax Service is a new company its Retained Earnings balance at June 30 will be equal to the net income for the month of June. Be sure to include a proper heading for each financial Statement.

7 Chapter 3 Problems Problem 3-7 Preparing Journal Entries The ABC Company s chart of accounts includes the following accounts: (a) Accounts Payable (b) Accounts Receivable (c) Capital Stock (d) Cash (e) Dividends (f) Equipment (g) Notes Payable (h) Rent Expense (i) Salaries Expense (j) Service Revenue (k) Supplies For each transaction in the table below, indicate the account to be debited and the account to be credited by placing the letter representing the account in the appropriate column. The first transaction is done as an example. Transaction Debit Credit 1. Stockholders invested cash in the company. (d) (c) 2. Paid rent for the month. 3. Received cash fees for services 4. Provided services, customers will pay in 60 days. 5. Paid employee salaries for the month 6. Purchased Equipment on account. 7. Paid half of the balance owed on equipment (see 6.) 8. Purchased supplies on account. 9. Borrowed money from the bank, giving a note in exchange. 10. Paid a cash dividend to stockholders.

8 Chapter 3 Problems Problem Matching a. accounting cycle h. account b. account balance i. credit c. general ledger j. debit d. general journal k. source document e. accrual basis of accounting l. posting f. double-entry accounting m. trial balance g. retained earnings n. cash basis of accounting Instructions: Match the terms above with the descriptions below. Each term should be used only once. 1. The first place where a transaction is recorded with debits and credits in a company s accounting system. 2. A component of an accounting system that includes a separate record for each account that appears in the financial statements. 3. The process of transferring information from the general journal to individual accounts in the general ledger. 4. The sequence of steps or procedures used to record, classify, and summarize accounting information. 5. The method of accounting where revenue is recorded in the period in which it is earned (when goods are services are received by customers) and expenses are recorded in the period in which they are incurred. This method is required by GAAP. 6. A record used to summarize all increases and decreases in a particular asset, such as Cash, or any other type of asset, liability, owner s equity, revenue, or expense. 7. The difference between the total debits and the total credits of a ledger account. 8. The documents upon which evidence of an accounting transaction are initially recorded. 9. A two column schedule listing the names and balances of all the accounts in the order in which they appear in the ledger. 10. The method of accounting where revenues and expenses are recorded in the time period when cash is received or paid.

9 Chapter 3 Problems 11. An amount entered on the right-hand side of a ledger account. 12. An amount entered on the left-hand side of a ledger account. 13. A systematic method of accounting by which every transaction affects at least two accounts. 14. That portion of stockholders equity resulting from net income earned in the business less any dividends paid to stockholders.

10 Chapter 3 Problems Problem 3-9 Revenue Recognition Santos Security Company carried out the following 5 transactions during the month of April 20x5. For each transaction state whether the transaction represented revenue to the company during the month of April 20x5. Give reasons for your decision. a. The company sold an additional 20,000 shares of capital stock and received $40,000 cash. b. The company borrowed $10,000 from Mays Landing Bank and signed a 6-month note payable at 8% interest. c. The company received an advance payment of $400 for security services to be provided in May 20x5. d. Collected $1,200 cash from a customer accounts receivable. This receivable originated from security services provided in February 20x5. e. Provided security services in the current month (April 20x5) for $2,200. The fee for these services is billed to the customer this month but will not be collected until May 20x5. Problem 3-10 Expense Recognition David s Computer Repair Company carried out the following 5 transactions during the month of September 20x5. For each transaction state whether the transaction represented an expense to the company during the month of September. Give reasons for your decision. a. Paid $240 for fuel used in September for the company s truck which is only used for service calls. b. Purchased equipment for $1,600. c. Paid $1,500 salary to an employee for time worked during September. d. Declared and paid a $500 dividend to stockholders. e. Paid an accountant $800 for services rendered in June 20x5.

11 Chapter 3 Solutions Problem 3-1 Solution May 2 The corporation issued 50,000 shares of capital stock to Sue Smith in exchange for $100,000 cash. May 2 - Cash has been invested in the business, therefore, the asset cash was increased by $100,000. Capital Stock has been issued to the owner, Sue Smith. Increases in ownship investment are recorded by increasing the Capital Stock account by $100,000. Summary for this transaction: Cash +$100,000, Capital Stock +$100,000 May 4 Purchased a truck for $30,000. Made a $10,000 cash down payment and issued a note payable for the remaining balance. May 4 - An asset (truck) has been purchased. Therefore, the asset Truck was increased by $30,000. A $10,000 down payment was made, therefore, Cash will decrease by $10,000. A note payable was issued for the remaining amount owed on the Truck, therefore, Notes Payable is increased $20,000. Summary for this transaction: Truck +$30,000, Cash -$10,000, Notes Payable +$20,000 May 5 Paid $1,500 to rent office space for the month. May 5 - Rent for the month has been incurred. Rent is an expense of running the business. Therefore, an expense account, Rent Expense, must be increased by $1,500. Since the rent was paid in cash the Cash account must be decreased by $1,500. Summary for this transaction: Rent Expense +$1,500, Cash -$1,500. May 9 Billed customers $11,500 for services performed for the first half of May. May 9 - Cleaning services have been performed for customers during the first half of May. Revenue should be recorded when services are performed. Therefore, Service Revenue should be increased by $11,500. Since the customers have been billed and have not yet paid, then they owe money to the company, therefore, Accounts Receivable should be increased by $11,500. Summary for this transaction: Service Revenue +$11,500, Accounts Receivable + $11,500 May 10 Paid $4,800 in salaries earned by employees during the first half of May. May 10 - Employees working for Sue's Cleaning have earned salaries. Salaries are an expense of running the business. Therefore, an expense account, Salaries (or Wages) Expense, must be increased by $4,800. Since the salaries were paid in cash the Cash account must be decreased by $4,800. Summary for this transaction: Salaries Expense +$4,800, Cash -$4,800. May 19 Paid David s Auto Shop $400 for maintenance and repair services on the company truck. May 19 - Maintenance and repair costs on the truck have been incurred this month. These costs are an expense of running the business. Therefore, an expense account, Maintenance Expense, must be increased by $400. Since this expense was paid in cash the Cash account must be decreased by $400. Summary for this transaction: Maintenance Expense +$400, Cash -$400. May 20 Collected $6,400 of the amounts billed to customers on May 9. May 20 - Cash collections from customers represent an inflow of cash. Therefore, the Cash account will be increased by $6,400. Since this transaction is a payment from a customer then the amount the customer owes in Accounts Receivable should be decreased by $6,400. Service revenue is not recorded at this time since it was properly recorded on May 9 when the services were performed. Summary for this transaction: Cash +$6,400, Accounts Receivable - $6,400 1

12 Chapter 3 Solutions May 28 Billed customers $14,200 for services performed during the second half of the month. May 28 - Cleaning services have been performed for customers during the second half of May. Revenue should be recorded when services are performed. Therefore, Service Revenue should be increased by $14,200. Since the customers have been billed and have not yet paid, then they owe money to the company, therefore, Accounts Receivable should be increased by $14,200. Summary for this transaction: Service Revenue +$14,200, Accounts Receivable + $14,200 May 30 Paid $10,200 in salaries earned by employees during the second half of the month. May 30 - Employees working for Sue's Cleaning have earned salaries. Salaries are an expense of running the business. Therefore, an expense account, Salaries (or Wages) Expense, must be increased by $10,200. Since the salaries were paid in cash the Cash account must be decreased by $10,200. Summary for this transaction: Salaries Expense +$10,200, Cash -$10,200. May 30 Received a $220 bill from ABC Supplies for cleaning supplies purchased and used in May. The entire amount is due by June 30. May 30 - Cleaning supplies used in May are an expense of that month. Therefore, an expense account, Supplies Expense, must be increased by $220. Since this expense will be paid in the future and not now then the Accounts Payable account must be increased by $220. Summary for this transaction: Supplies Expense +$220, Accounts Payable +$220. May 30 Declared a $1,400 dividend payable on June 22. May 30 - A Dividend has been declared. This represents a distribution of cash to be made to the stockholder(s) at a future date (June 22). Dividends are recorded in a special account called Dividends which eventually will be deducted from Retained Earnings (see Chapter 4). Therefore, the Dividends account should be increased by $1,400 and since it will be paid in the future the Dividends Payable account should be increased by $1,400. Summary for this transaction: Dividends +$1,400, Dividends Payable +$1,400. May 31 Made a partial payment of $110 for the amount owed to ABC Supplies from the second May 30 entry. May 31 - Cash payments made to suppliers represent an outflow of cash. Therefore, the Cash account will be decreased by $110. Since this transaction is a payment from the company for an already recorded Accounts Payable then the amount owed in Accounts Payable should be decreased by $110. Supplies Expense is not recorded at this time since it was properly recorded on May 30 when the supplies were received and used. Summary for this transaction: Cash -$110, Accounts Payable - $110 2

13 Chapter 3 Solutions Problem Solution Analyzing transactions and Their Effects on Account Balances September 1 - Cash has been invested in the business therefore the asset Cash was increased by $400,000. Capital Stock has been issued to the owner, Sid Simon. Increases in ownership investment are recorded by increasing the Capital Stock account by $400,000. Summary for this entry: Cash +$400,000, Capital Stock +$400,000. September 4 Two assets, Land and Building, have been purchased for $100,000 and $120,000, respectively. Therefore, increase the asset Land by $100,000 and the asset Building by $120,000. A cash payment of $80,000 was made so Cash should be decreased by $80,000. A note payable was issued for the remaining amount owed; therefore, Notes Payable is increased $140,000. Summary for this entry: Land +$100,000, Building +$120,000, Cash -$80,000, Notes Payable +$140,000. September 9 An asset, Computers, has been purchased for $14,000 cash. Therefore, increase the asset Computers by $14,000 and decrease the asset Cash by $14,000 Summary for this entry: Computers +$14,000, Cash -$14,000. September 16 An asset, Office Fixtures & Equipment, has been purchased for $50,000. Therefore, increase the asset Office Fixtures & Equipment by $50,000. As $10,000 was paid at the time of purchase decrease the asset Cash by $10,000. Since no formal note payable was signed record the remaining amount owed as an increase to Accounts Payable of $40,000 Summary for this entry: Office Fixtures & Equipment +$50,000, Cash -$10,000, Accounts Payable +40,000. September 21 An asset, Office Supplies, has been purchased for $2,000 cash. Therefore, increase the asset Office Supplies by $2,000 and decrease the asset Cash by $2,000 Summary for this entry: Office Supplies +$2,000, Cash -$2,000. September 24 Services have been performed for clients. Revenue should be recorded when services are performed. Therefore, Service Revenue should be increased by $3,400. A partial payment of $1,200 was received so increase Cash by that amount. The remaining amount that is owed $2,200 ($3,400-$1,200) should be recorded as an increase to the asset Accounts Receivable. 3

14 Chapter 3 Solutions Summary for this entry: Service Revenue +$3,400, Cash +$1,200, Accounts Receivable +$2,200. September 27 A $500 bill or invoice was received for advertising incurred. Advertising is an expense of running the business so increase Advertising Expense by $500. Since this amount will be owed or paid in the future increase Accounts Payable by $500. Summary for this entry: Advertising Expense +$500, Accounts Payable +$500. September 28 Cash collections from customers represent an inflow of cash. Therefore, the Cash account will be increased by $700. Since this transaction is a payment from a customer then the amount the customer owes in Accounts Receivable is decreased by $700. Summary for this entry: Cash +$700, Accounts Receivable -$700. September 31 Employees worked and earned $2,400 in salaries in September. Salaries are an expense of running the business so increase Salaries Expense by $2,400. Since this amount is paid to the employees decrease Cash by $2,400. Summary for this entry: Salaries Expense +$2,400, Cash - $2,400. 4

15 Chapter 3 Solutions Problem 3-3 Solution Part (a) General Journal Date Account Title Debit Credit 1-Mar Cash 1,000,000 Capital Stock 1,000,000 The owner, Sean Bean, invests cash into the business in exchange of 20,000 shares of capital stock. 6-Mar Land 180,000 Building 260,000 Cash 150,000 Notes Payable 290,000 Purchased Land and a Building paying $150,000 in cash and issuing a Note Payable for the balance. 10-Mar Computer Systems 14,000 Cash 14,000 Computer equipment purchases for cash. 12-Mar Office Furnishings 12,000 Cash 4,000 Accounts Payable 8,000 Purchased office furnishings paying $4,000 cash with remainder owed on account. 20-Mar Office Supplies 1,800 Cash 1,800 Purchased office supplies for cash. 25-Mar Accounts Receivable 44,000 Consulting Fees Earned 44,000 Bill customers for consulting services provided in March. 26-Mar Accounts Payable 4,000 Cash 4,000 Paid $4,000 of accounts payable from March Mar Utilities Expense 2,400 Telephone Expense 260 Cash 2,660 Paid utilities and telephone bills for March. 28-Mar Salaries Expense 8,400 Cash 8,400 Paid employee salaries for March. 29-Mar Cash 22,000 Accounts Receivable 22,000 Received cash from customers in partial settlement of the billing from March 25. 5

16 Chapter 3 Solutions Part (b) Cash Accounts Receivable Office Supplies Office Furnishings 1,000, ,000 44,000 22,000 1,800 12,000 22,000 14,000 22,000 4,000 1,800 4,000 2,660 8, ,140 Computer Systems Consulting Fees Earned Utilities Expense Telephone Expense 14,000 44,000 2, Salaries Expense Land Building Notes Payable 8, , , ,000 Accounts Payable Capital Stock 4,000 8,000 1,000,000 4,000 6

17 Chapter 3 Solutions Part O.C. Consulting Co. Trial Balance March 31, 20x5 Debit Credit Cash $ 837,140 Accounts Receivable 22,000 Office Supplies 1,800 Office Furnishings 12,000 Computer Systems 14,000 Consulting Fees Earned $ 44,000 Utilities Expense 2,400 Telephone Expense 260 Salaries Expense 8,400 Land 180,000 Building 260,000 Notes Payable 290,000 Accounts Payable 4,000 Capital stock 1,000,000 Total $ 1,338,000 $ 1,338,000 7

18 Chapter 3 Solutions Problem 3-4 Solution, Part (a) General Journal Date Account Title Debit Credit 1-Apr Cash 80,000 Capital Stock 80,000 The owner, John Swifty invests cash into the business in exchange of 40,000 shares of capital stock. 5-Apr Truck 44,000 Cash 12,000 Notes Payable 32,000 Purchased a truck paying $12,000 in cash and issuing a Note Payable for the balance. 7-Apr Rent Expense 1,800 Cash 1,800 Paid West Office Park for April rent. 9-Apr Accounts Receivable 12,000 Service Revenue 12,000 Billed customers for plumbing services for the first half of April. 10-Apr Salaries Expense 6,400 Cash 6,400 Paid employee salaries for the first half of April. 14-Apr Maintenance & Repair Expense 1,200 Cash 1,200 Paid maintenance and repair costs on the company truck. 16-Apr Cash 4,200 Accounts Receivable 4,200 Received cash from customers in partial settlement of the billing from April Apr Accounts Receivable 14,400 Service Revenue 14,400 Billed customers for plumbing services for the second half of April. 30-Apr Salaries Expense 6,400 Cash 6,400 Paid employee salaries for the second half of April. 30-Apr Fuel Expense 1,200 Accounts Payable 1,200 Received a bill for fuel purchased and used in April. 30-Apr Dividends 1,000 Dividends Payable 1,000 Declared a dividend payable on May 20. 8

19 Chapter 3 Solutions Problem 3-4 Solution, Part (b) [account balances are highlighted] Cash Accounts Receivable Truck Notes Payable 80,000 12,000 12,000 4,200 44,000 32,000 4,200 1,800 14,400 6,400 22,200 1,200 6,400 56,400 Accounts Payable Dividends Payable Capital Stock Retained Earnings 1,200 1,000 80,000 - Maint. & Repair Dividends Service Revenue Expense Fuel Expense 1,000 12,000 1,200 1,200 14,400 26,400 Salaries Expense Rent Expense 6,400 1,800 6,400 12,800 9

20 Chapter 3 Solutions Problem 3-4 Solution, Part (c) Swifty Plumbing, Inc. Trial Balance April 30, 20x5 Debit Credit Cash $ 56,400 Accounts Receivable 22,200 Truck 44,000 Notes Payable 32,000 Accounts Payable 1,200 Dividends Payable $ 1,000 Capital Stock 80,000 Retained Earnings 0 Dividends 1,000 Service Revenue 26,400 Maintenance & Repair Expense 1,200 Fuel Expense 1,200 Salaries Expense 12,800 Rent Expense 1,800 Total $ 140,600 $ 140,600 10

21 Chapter 3 Solutions Problem 3-5 Income Statement Balance Sheet Transaction Net Stockholder's Date Revenues - Expenses = Income Assets = Liabilities + Equity Jan. 2 NE NE NE I NE I* Jan. 6 NE NE NE I I NE Jan. 8 NE NE NE NE NE NE Jan. 15 NE NE NE I I NE Jan. 21 I NE I I NE I Jan. 29 NE I D NE I D Jan. 31 NE I D D NE D * Note: Any transaction affecting net income will affect stockholder's equity in the same way because net income eventually is transferred to Retained Earning (see Chapter 4). 11

22 Chapter 3 Solutions Problem 3-6 Solution Using a Trial Balance to Prepare an Income Statement and Balance Sheet Jack's Tax Service Income Statement For the Month Ended June 30, 20x5 Revenues: Service Revenue $ 200,000 Expenses: Salaries Expense $ 34,000 Telephone Expense 2,000 Insurance Expense 2,400 Utilities Expense 1,200 Total Expenses 39,600 Net Income $ 160,400 Jack's Tax Service Balance Sheet June 30, 20x5 Assets: Cash $ 588,400 Liabilities and Stockholders' Equity: Liabilities: Accounts Receivable 24,000 Accounts Payable $ 22,000 Marketable Securities 20,000 Notes Payable $ 40,000 Office Equipment 10,000 Total Liabilities 62,000 Land 120,000 Owners' Equity: Building 200,000 Capital Stock $ 740,000 Retained Earnings 160,400 Total Stockholders' Equity 900,400 Total Assets $ 962,400 Total Liabilities + Stockholders' Equity $ 962,400 Note: Retained Earnings, June 30 = RE, June 1 (0) + Net Income (160,400) - Dividends (0) 12

23 Chapter 3 Solutions Problem 3-7 Solution Preparing Journal Entries Transaction Debit Credit 1. Stockholders invested cash in the company. (d) (c) 2. Paid rent for the month. (h) (d) 3. Received cash fees for services (d) (j) 4. Provided services, customers will pay in 60 days. (b) (j) 5. Paid employee salaries for the month (i) (d) 6. Purchased Equipment on account. (f) (a) 7. Paid half of the balance owed on equipment (see 6.) (a) (d) 8. Purchased supplies on account. (k) (a) 9. Borrowed money from the bank, giving a note in exchange. (d) (g) 10. Paid a cash dividend to stockholders. (e) (d) Problem 3 8 Solution - Matching 1. d 2. c 3. l 4. a 5. e 6. h 7. b 8. k 9. m 10. n 11. i 12. j 13. f 14. g 13

24 Chapter 3 Solutions Problem 3-9 Solution - Revenue Recognition a. Not Revenue. Selling shares of stock (owner investment) in a company is not revenue because no goods or services are provided to customers. b. Not Revenue. Borrowing money from a bank is not revenue because no goods or services are provided to customers. c. Not Revenue. An advance payment from customers is not revenue for April 20x5 since goods or services are not provided to customers in April 20x5. The $400 will be recorded as revenue in May 20x5 when the security services are provided. In Chapter 4 we will see that the $400 advance payment will be recorded in April in an unearned revenue account which is a liability. d. Not Revenue. Since the services were provided to customers in February 20x5 the revenue should be recorded in that month and not in April 20x5. e. Revenue. Since security services were provided in April 20x5 then Revenue should be recorded in April 20x5 even though the cash will not be collected until next month. Problem 3-10 Solution - Expense Recognition David s Computer Repair Company carried out the following 5 transactions during the month of September 20x5. For each transaction state whether the transaction represented an expense to the company during the month of September. Give reasons for your decision. a. Expense. This transaction represents an expense for September 20x5 since the fuel was used in that month to help generate revenue. b. Not an Expense. The purchase of equipment is recorded as an asset acquired in September 20x5. A portion of the cost of this asset will become expense each month through the process of depreciation which is covered in Chapter 4. c. Expense. Employee salaries incurred in September 20x5 are an expense of September 20x5 since this resource, employee services, was used in that month to help generate revenue. d. Not an Expense. Dividends paid are a distribution of profits to stockholders. Dividends are not an expense because they do not represent resources used to help generate revenue. e. Not an Expense. This is not an expense for September because the services were provided by accountant in June 20x5. This transaction would be an expense in the month of June 20x5. 14

25 Professor In A Box: Financial Accounting Exam 1 (Chapters 1 through 4) 150 points Multiple Choice (32 points - 2 points each) 1. Which type of company earns revenue by buying inventory from a supplier and selling it? (a) Service company (b) Manufacturing company (c) Merchandising company (d) All of the above (e) None of the above 2. The basic rules of financial accounting are referred to as: (a) Generally accepted auditing standards (b) Generally accepted accounting principles (c) Financial accounting standards (d) Generally accepted auditing principles (e) None of the above 3. Which financial statement summarizes the revenues, expenses, and profitability of a business entity for a specific time period? (a) Balance sheet (b) Statement of stockholders equity (c) Statement of cash flows (d) Income statement 4. Which financial statement shows the assets, liabilities, and stockholders equity of a business entity at a specific date? (a) Balance sheet (b) Statement of stockholders equity (c) Statement of cash flows (d) Income statement 5. Which financial statement provides information on a company s own stock and retained earnings for a specific time period? (a) Balance sheet (b) Statement of stockholders equity (c) Statement of cash flows (d) Income statement 1

26 6. Which underlying concept of financial accounting states that a business and its accounting records are separate from the personal affairs of its owner? (a) Business entity concept (b) Going concern concept (c) Historical cost concept (d) Revenue recognition concept 7. Which underlying concept of financial accounting states that the assets of a company are recorded and reported in the financial statements at their acquisition cost? (a) Business entity concept (b) Going concern concept (c) Historical cost concept (d) Revenue recognition concept 8. Which underlying concept of financial accounting states that to properly determine net income for a time period it is necessary to compare the revenue generated in that time period with the related expenses incurred during that same time period in generating that revenue? (a) Matching concept (b) Full disclosure concept (c) Historical cost concept (d) Revenue recognition concept 9. Which underlying concept of financial accounting states that a company s financial statements and footnotes should include all circumstances and events that would make a difference to financial statement users? (a) Matching concept (b) Full disclosure concept (c) Historical cost concept (d) Objectivity concept 2

27 10. Which underlying concept of financial accounting states that once a company has adopted a particular accounting method it should follow that method constantly from year to year rather than switching methods from one year to the next? (a) Matching concept (b) Stability concept (c) Consistency concept (d) Objectivity concept 11. Which form of business organization is for a business which is organized as a separate legal entity from its owners and has ownership divided into transferable shares of stock? (a) Sole proprietorship (b) Corporation (c) Partnership (d) All of the above 12. Recording revenues and expenses as incurred without regard to the date that cash is paid or received is indicative of which of the following? (a) Tax basis of accounting (b) Cash basis of accounting (c) Accrual basis of accounting (d) None of the above 13. Which of the following is a two column schedule listing the names and balances of all the accounts in the order in which they appear in the general ledger? (a) Balance sheet (b) Trial balance (c) General journal (d) Income statement 3

28 14. Which of the following is false? (a) Every adjusting entry involves a change in an income statement account and a balance sheet account. (b) Adjusting Entries are recorded in the general journal on the last day of the accounting period. (c) Adjusting entries are prepared after closing entries. (d) Adjusting Entries are needed to make certain that the correct amounts of revenue and expenses are reported in the company s income statement for each year. (e) All of the above are true. 15. Which is the last step performed in the accounting cycle? (a) Recording closing entries (b) Preparing a trial balance (c) Recording adjusting entries (d) Posting from the general journal to the general ledger 16. Which of the following are temporary or nominal accounts which must be closed when preparing closing entries? (a) Assets (b) Liabilities (c) Expenses (d) Stockholders equity accounts 4

29 Problem 1 (24 points) Revenue and Expense Recognition The Texas Landscaping Company carried out the following transactions during the month of July 20x4. For transactions (a), (b), and (c) state whether the transaction represented revenue to the company during the month of July 20x4. Give reasons for your decision. (a) The company borrowed $20,000 from the Longhorn Bank and signed a one year note payable at 7% interest. (b) The company provided landscaping services to a customer in June 20x4 for $1,200. The fee for these services was billed to the customer and was collected in July 20x5. (c) In June 20x4 the company received an advance payment of $200 for security services to be provided in July 20x4. These services were provided during July 20x4. For transactions (d), (e), and (f) state whether or not the transaction represented an expense to the company during the month of July 20x4. Give reasons for your decision. (d) Purchased additional landscaping equipment for $700. (e) On July 10, 20x4 received and paid a bill for high speed internet services for the month of June 20x4. (f) On August 2, 20x4 paid employees $3,200 for work performed in July 20x4. 5

30 Problem 2 (22 points) Journalizing Transactions, Posting to the Ledger, and Preparing a Trial Balance Bob Boal is the founder and president of NC Consulting, a financial planning company that gives investment advice to its clients. The following business transactions occurred during May of the current year: May 1 Boal and several others invested $400,000 cash in the business in exchange for 10,000 shares of capital stock. May 5 The company purchased office equipment $120,000. A cash payment of $22,000 was made and a note payable was issued for the balance of the purchase price. May 10 N.C. Consulting billed customers for services provided in May for $128,000. May 14 The company received and paid the following bills for the month of May: insurance $700 and telephone $160. May 28 The company incurred employees salaries of $25,200 for work performed in May. These salaries would be paid to employees on June 2. May 29 Received $126,000 from customers in partial settlement of the accounts receivable created on May 10. Instructions (a) Prepare journal entries (without explanations) to record the above transactions. Select the appropriate account titles from the following chart of accounts: Cash, Accounts Receivable, Office Equipment Salaries Payable, Notes Payable, Capital Stock, Consulting Fees Earned, Telephone Expense, Salaries Expense, and Insurance Expense. (b) Using the T- Accounts provided below, post the journal entry for each transaction. Cash Accounts Receivable Office Equipment Salaries Payable Notes Payable Capital Stock Consulting Fees Earned Telephone Expense Salaries Expense Insurance Expense (c) Prepared a trial balance dated May 31. 6

31 Professor In A Box: Financial Accounting Financial Accounting Professor Licata Exam 1 Solution & Grading Guide 150 points Multiple Choice (2 points each x 16 = 32 points) Grading Guide ==> Deduct 2 points for each incorrect answer 1 c 9 b 2 b 10 c 3 d 11 b 4 a 12 c 5 b 13 b 6 a 14 c 7 c 15 a 8 a 16 c 1

32 Problem 1 Revenue and Expense Recognition - Solution (4 points each x 6 = 24 points) Grading Guide ==> Deduct 4 points for each incorrect answer. Note: Grade only the boldfaced answers below not the explanations. (a) Not Revenue. Borrowing money from a bank is not revenue because no goods or services are provided to customers. (b) Not Revenue in July 20x4. Since the services were provided to customers in June 20x4. The $1,200 would be revenue for the month of June 20x4, the month in which the srvices were provided. (c) Revenue in July 20x4. An advance payment from customers is not revenue for June 20x4 since goods or services are not provided to customers in that month. The $200 will be recorded as revenue in July 20x4 when the landscaping services were provided to customers. (d) Not an Expense. The purchase of landscaping equipment is recorded as an asset acquired in July 20x4. (Note: A portion of the cost of this asset will become expense each month through the process of depreciation which is covered in Chapter 4). (e) Not an Expense for July 20x4. The cost of high speed internet services incurred in June 20x4 are not an expense of July 20x4 since this resource, high speed internet services, was used in June 20x4 to help generate revenue. This item would be an expense of June 20x4. (f) Expense. Employee salaries incurred for work performed in July 20x4 are an expense of July 20x4 since this resource, employee services, was used in that month to help generate revenue. 2

33 Problem 2 - Solution (22 Points) Part (a) - Journal entries (2 points each x 6 = 12 points) Grading Guide ==> Deduct 2 points for each incorrect journal entry. Each journal entry must exactly match the solution below. Date Account Title Debit Credit 1-May Cash 400,000 Capital Stock 400,000 5-May Office Equipment 120,000 Cash 22,000 Notes Payable 98, May Accounts Receivable 128,000 Consulting Fees Earned 128, May Insurance Expense 700 Telephone Expense 160 Cash May Salaries Expense 25,200 Salaries Payable 25, May Cash 126,000 Accounts Receivable 126,000 Part (b) - T Accounts Grading Guide ==> Do not grade part (b), the T accounts. Instead the trial balance which is constructed from the T account data will be graded in part (c). Cash Accounts Receivable Office Equipment (5/1) 400,000 (5/5) 22,000 (5/10) 128,000 (5/29) 126,000 (5/5) 120,000 (5/29) 126,000 (5/14) 860 2, ,140 Salaries Payable Notes Payable Capital Stock (5/28) 25,200 (5/5) 98,000 (5/1) 400,000 Consulting Fees Earned Telephone Expense Salaries Expense (5/10) 128,000 (5/14) 160 (5/28) 25,200 Insurance Expense (5/14) 700 3

34 Part (c) - Trial Balance (10 points) Grading Guide ==> Deduct 1 point for each incorrect balance below. Problem 2 - Solution, Part (c) N. C. Consulting Co. Trial Balance 31-May Debit Credit Cash $ 503,140 Accounts Receivable 2,000 Office Equipment 120,000 Salaries Payable $ 25,200 Notes Payable 98,000 Capital stock 400,000 Consulting Fees Earned 128,000 Telephone Expense 160 Salaries Expense 25,200 Insurance Expense 700 Total 651, ,200 4