DISCUSSION QUESTIONS. Suggested Responses

Transcription

1 DISCUSSION QUESTIONS Suggested Responses 1. Assets represent cash, properties, and other things of value owned by a business. Liabilities are debts or amounts owed to creditors. Owner s equity is the owner s right to or investment in a business or the excess of assets over liabilities. Revenues are the amounts a business earns as a result of selling a product or service to customers. Expenses are the costs involved in the earning of revenue. 2. The separate entity concept means that a business is treated as a separate economic accounting unit or entity from the owner. The business is independent or stands by itself; it is separate from its owners, creditors, and customers. 3. Accounts Payable represents the amounts the business owes its creditors. Accounts Receivable represents the amounts due from charge customers or the amount the company is expected to receive from customers. 4. Two ways to increase owner s equity are (1) to make additional investments and (2) to earn revenues. Two ways to decrease owner s equity are (1) to make personal withdrawals and (2) to incur expenses. 5. The purchase of supplies on account results in an increase in Supplies Expense (an expense) and an increase in Accounts Payable (a liability). Had the purchase been made with a cash payment, there would be a decrease in cash (an asset) instead of an increase in Accounts Payable. Therefore, the effect on owner s equity is the same a decrease in owner s equity because of the increase in Supplies Expense. 6. In a withdrawal, the owner is reducing his or her investment, hoping that the reduction will be offset by net income. A Wages Expense account is used to record the cost of work or labor performed by employees of a company, not owner withdrawals. 7. The chart of accounts is a company s official list of accounts. The list is designed especially for the business. Usually, for a service business, the 100s are used for asset accounts, the 200s for liability accounts, the 300s for owner s equity accounts, the 400s for revenue accounts, and the 500s for expense accounts. 8. (Note: Answers to the question will vary.) Assets Accounts Receivable 124 Equipment Liabilities 221 Accounts Payable Owner s Equity 311 W. Sanders, Capital 312 W. Sanders, Drawing Revenue 411 Tour Income Expenses 511 Wages Expense 512 Rent Expense 513 Supplies Expense 516 Miscellaneous Expense 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 7

2 SOLUTIONS TO EXERCISES Exercise 1-1 a. $14,800 A L = OE $22,000 $7,200 = $14,800 b. $40,000 L + OE = A $18,000 + $22,000 = $40,000 c. $12,000 A OE = L $27,000 $15,000 = $12,000 Exercise 1-2 a. $26,300 A OE = L $60,800 $34,500 = $26,300 b. $35,200 A L = OE $57,000 $21,800 = $35,200 c. $40,280 L + OE = A $11,780 + $28,500 = $40,280 Exercise 1-3 Assets = Liabilities + Owner s Equity Assets = $2,995 + $63,000 + $8,450 Liabilities = $3,816 + $3,728 Assets Liabilities = Owner s Equity Thus, Assets $74,445 = Liabilities $7,544 + Owner's Equity $66,901 Exercise 1-4 Examples of correct answers: a. Buy an asset on account. (Buy an office building using a mortgage.) b. Pay a creditor on account. (Make a monthly cash loan payment to the bank.) c. Pay a bill with cash. (Pay the cell phone bill with cash.) d. Owner invests cash or other assets in the business. (Owner invests cash in the business.) e. Sell an asset for cash or buy an asset for cash. (Sell a company building for cash.) f. Sell services either for cash or on account. (An accountant does the tax return for a client, and the client pays cash.) Exercise 1-5 a. Company received $18,200 cash from the owner, who was investing in the business. b. Company paid $1,375 cash to buy professional equipment. c. Company bought office equipment costing $640 and promised to pay that amount in the future (on account). d. Company bought professional equipment costing $7,000, paid $2,200 in cash and promised to pay the remaining $4,800 in the future (on account). e. Company paid $1,000 cash to a creditor to pay an amount owed on account Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3 Exercise 1-6 Exercise 1-7 Exercise 1-8 a. E f. R b. R g. OE c. A h. E d. OE i. A e. L j. E a. Paid the rent for the month, $1,050. b. Bought advertising on account for $835. c. Sold services on account for $372. d. Owner withdrew $410 for personal use. e. Bought equipment for $1,850, paying $850 in cash and placing the balance of $1,000 on account. f. Customers paid $1,650 of the amount owed on account. a. Company received $25,000 in cash and $4,500 in equipment from the owner, who was investing in the business. b. Company paid the rent for the month, $1,250. c. Company sold services on account, $2,000. d. Company bought equipment for $16,000, paying $3,700 in cash and placing the balance of $12,300 on account. e. Owner withdrew $2,500 for personal use Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 9

4 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5 Problem 1-1A Assets = Liabilities + Office Equipment Accounts Payable + = + Owner's Equity J. Larkin, J. Larkin, Capital Drawing + Revenue Expenses (a) + 25, ,000 (b) Bal. 24,050 = + 25, (c) Bal. 23,693 = + 25,000 1,307 (d) + 8, ,956 Bal. 23, ,956 = 8, ,000 1,307 (e) , Bal. 22, ,592 = 9, ,000 1,307 (f) + 3, ,482 (Professional Fees) Bal. 26, ,592 = 9, , ,482 1,307 (g) Bal. 25, ,592 = 8, , ,482 1,307 (h) Bal. 25, ,592 = 8, , ,482 1,689 (i) 1, ,050 Bal. 24, ,592 = 8, , ,482 2,739 (j) + 3, ,295 (Professional Fees) (Rent Expense) (Supplies Expense) (Utilities Expense) (Salary Expense) Bal. 27, ,592 = 8, , ,777 2,739 (k) 1, ,250 Bal. 26, ,592 = 8, ,000 1, ,777 2,739 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 11

6 Problem 1-1A (concluded) Left Side of Equals Sign: Office Equipment $26,138 Right Side of Equals Sign: Accounts Payable $ 8,942 10,592 J. Larkin, Capital 25,000 J. Larkin, Drawing 1,250 Revenue 6,777 Expenses 2,739 $36,730 $36, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

7 Problem 1-2A + Assets = Liabilities + Owner's Equity Office Professional Accounts R. Green, R. Green, Equipment + Equipment = Payable + Capital Drawing + Revenue Expenses (a) + 30, ,000 (b) 1, ,800 (Rent Expense) Bal. 28,200 = 30,000 1,800 (c) Bal. 27,838 = 30,000 2,162 (d) + 18, ,000 Bal. 27, ,000 = 18, ,000 2,162 (e) , ,000 Bal. 26, , ,000 = 20, ,000 2,162 (f) + 4, ,600 (Professional Fees) (Supplies Expense) Bal. 31, , ,000 = 20, ,000 2,162 (g) Bal. 30, , ,000 = 19, , ,600 2,162 (h) (Utilities Expense) Bal. 30, , ,000 = 19, , ,600 2,529 (i) 1, ,150 (Salary Expense) Bal. 29, , ,000 = 19, , ,600 3,679 (j) + 3, ,868 (Professional Fees) Bal. 33, , ,000 = 19, , ,468 3,679 (k) 1, ,800 Bal. 31, , ,000 = 19, ,000 1, ,468 3,679 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 13

8 Problem 1-2A (concluded) Left Side of Equals Sign: Office Equipment Professional Equipment Right Side of Equals Sign: $31,399 Accounts Payable $19,300 2,890 R. Green, Capital 30,000 18,000 R. Green, Drawing 1,800 Revenue 8,468 Expenses 3,679 $52,289 $52, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

9 Problem 1-3A + Assets = Liabilities + Prepaid Office Photo Accounts Insurance + Equipment + Equipment = Payable + (a) + 20, ,000 + (b) 4, ,120 Bal. 20, ,120 = 4, ,000 Owner's Equity S. Davis, S. Davis, Capital Drawing + Revenue (c) + 5, ,370 Bal. 20, , ,370 = 4, ,370 (d) 1, ,500 Bal. 18, , ,370 = 4, ,370 1,500 (e) Bal. 18, , ,370 = 4, ,370 1,715 (f) 1, ,840 Bal. 16, , , ,370 = 4, ,370 1,715 (g) + 3, ,616 (Professional Fees) Bal. 20, , , ,370 = 4, , ,616 1,715 (h) Bal. 19, , , ,370 = 4, , ,616 2,697 (i) Bal. 18, , , ,370 = 4, , ,616 2,831 (j) Bal. 18, , , ,370 = 4, , ,616 3,016 (k) + 3, ,693 (Professional Fees) Expenses (Rent Expense) (Supplies Expense) (Salary Expense) (Telephone Expense) (Repair Expense) Bal. 22, , , ,370 = 4, , ,309 3,016 (l) Bal. 21, , , ,370 = 3, , ,309 3,016 (m) 1, ,800 Bal. 20, , , ,370 = 3, ,370 1, ,309 3,016 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 15

10 Problem 1-3A (concluded) Left Side of Equals Sign: Prepaid Insurance Office Equipment Photo Equipment Right Side of Equals Sign: $20,003 Accounts Payable $ 3,470 1,840 S. Davis, Capital 25,370 4,120 S. Davis, Drawing 1,800 5,370 Revenue 7,309 Expenses 3,016 $31,333 $31, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11 Problem 1-4A Assets = Liabilities + Owner's Equity Accounts Prepaid Accounts B. Gervais, B. Gervais, + Receivable + Insurance + Truck + Equipment = Payable + Capital Drawing + Revenue Expenses (a) + 25, ,000 (b) 8, , ,329 Bal. 17, ,329 = 18, ,000 (c) + 3, ,795 Bal. 17, , ,795 = 22, ,000 (d) 1, ,255 Bal. 15, , ,795 = 22, ,000 1,255 (e) Bal. 15, , ,795 = 22, ,000 1,255 (f) + 3, ,012 (Catering Income) Bal. 18, , ,795 = 22, , ,012 1,255 (g) Bal. 18, , ,795 = 22, , ,012 1,440 (h) + 4, ,307 (Catering Income) Bal. 18, , , ,795 = 22, , ,319 1,440 (i) Bal. 17, , , ,795 = 22, , ,319 1,688 (j) Bal. 17, , , ,795 = 22, , ,319 1,816 (k) + 2, ,649 (Catering Income) (Rent Expense) (Supplies Expense) (Utilities Expense) (Gas and Oil Expense) Bal. 20, , , ,795 = 22, , ,968 1,816 (l) 1, ,550 Bal. 19, , , ,795 = 22, ,000 1, ,968 1,816 (m) 1, ,150 (Salary Expense) Bal. 17, , , ,795 = 22, ,000 1, ,968 2,966 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 17

12 Problem 1-4A (concluded) Left Side of Equals Sign: Accounts Receivable Prepaid Insurance Truck Equipment Right Side of Equals Sign: $17,873 Accounts Payable $22,252 4,307 B. Gervais, Capital 25, B. Gervais, Drawing 1,550 26,329 Revenue 9,968 3,795 Expenses 2,966 $52,704 $52, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

13 Problem 1-1B Assets = Liabilities + Owner's Equity Office Accounts M. Wallace, M. Wallace, + Equipment = Payable + Capital Drawing + Revenue Expenses (a) + 24, ,000 (b) Bal. 23,350 = + 24, (c) (Supplies Expense) Bal. 22,975 = + 24,000 1,025 (d) + 6, ,300 Bal. 22, ,300 = 6, ,000 1,025 (e) (Advertising Expense) Bal. 22, ,300 = 6, ,000 1,480 (f) + 3, ,944 (Service Income) (Rent Expense) Bal. 26, ,300 = 6, , ,944 1,480 (g) 1,500 1,500 Bal. 25, ,300 = 5, , ,944 1,480 (h) (Utilities Expense) Bal. 25, ,300 = 5, , ,944 1,820 (i) Bal. 24, ,300 = 4, , ,944 1,820 (j) (Truck Maintenance) Bal. 24, ,300 = 4, , ,944 2,255 (k) 1, ,500 Bal. 22, ,300 = 4, ,000 1, ,944 2,255 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 19

14 Problem 1-1B (concluded) Left Side of Equals Sign: Office Equipment Right Side of Equals Sign: $22,689 Accounts Payable $ 4,800 6,300 M. Wallace, Capital 24,000 M. Wallace, Drawing Revenue 1,500 3,944 Expenses 2,255 $28,989 $28, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

15 Problem 1-2B Assets = Liabilities + Owner's Equity Office Professional Accounts K. Haas, K. Haas, + Equipment + Equipment = Payable + Capital Drawing + Revenue Expenses (a) + 48, ,000 (b) 2, ,200 Bal. 45,800 = + 48,000 2,200 (c) 2, ,138 Bal. 43,662 = + 48,000 4,338 (d) + 18, ,000 Bal. 43, ,000 = 18, ,000 4,338 (e) + 1, ,955 Bal. 43, , ,000 = 19, ,000 4,338 (f) + 8, ,960 (Professional Fees) (Rent Expense) (Supplies Expense) Bal. 52, , ,000 = 19, , ,960 4,338 (g) 3,000 3,000 Bal. 49, , ,000 = 16, , ,960 4,338 (h) Bal. 49, , ,000 = 16, , ,960 4,810 (i) 1, ,738 Bal. 47, , ,000 = 16, , ,960 6,548 (j) + 10, ,196 (Professional Fees) (Utilities Expense) (Salary Expense) Bal. 57, , ,000 = 16, , ,156 6,548 (k) 3, ,500 Bal. 54, , ,000 = 16, ,000 3, ,156 6,548 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 21

16 Problem 1-2B (concluded) Left Side of Equals Sign: Office Equipment Professional Equipment Right Side of Equals Sign: $54,108 Accounts Payable $16,955 1,955 K. Haas, Capital 48,000 18,000 K. Haas, Drawing 3,500 Revenue 19,156 Expenses 6,548 $74,063 $74, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

17 Problem 1-3B Assets = Liabilities + Owner's Equity Prepaid Office Accounts P. Schwartz, P. Schwartz, + Insurance + Equipment + Library = Payable + Capital Drawing + Revenue Expenses (a) + 25, ,000 (b) + 9, ,670 Bal. 25, ,670 = 9, ,000 (c) + 2, ,800 Bal. 25, , ,800 = 9, ,800 (d) 1, ,700 (Rent Expense) Bal. 23, , ,800 = 9, ,800 1,700 (e) (Supplies Expense) Bal. 22, , ,800 = 9, ,800 2,118 (f) Bal. 21, , ,800 = 9, ,800 2,118 (g) + 8, ,518 (Professional Fees) Bal. 30, , ,800 = 9, , ,518 2,118 (h) 1, ,820 (Salary Expense) Bal. 28, , ,800 = 9, , ,518 3,938 (i) (Telephone Expense) Bal. 28, , ,800 = 9, , ,518 4,326 (j) (Utilities Expense) Bal. 27, , ,800 = 9, , ,518 4,694 (k) + 9, ,260 (Professional Fees) Bal. 37, , ,800 = 9, , ,778 4,694 (l) 2,670 2,670 Bal. 34, , ,800 = 7, , ,778 4,694 (m) 2, ,500 Bal. 31, , ,800 = 7, ,800 2, ,778 4,694 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 23

18 Problem 1-3B (concluded) Left Side of Equals Sign: Right Side of Equals Sign: $31,970 Accounts Payable $ 7,000 Prepaid Insurance 944 P. Schwartz, Capital 27,800 Office Equipment 9,670 P. Schwartz, Drawing 2,500 Library 2,800 Revenue 17,778 Expenses 4,694 $45,384 $45, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

19 Problem 1-4B Assets = Liabilities + Owner's Equity T. Carter, Drawing Accounts Prepaid Accounts T. Carter, + Receivable + Insurance + Truck + Equipment = Payable + Capital + Revenue Expenses (a) + 25, ,000 (b) 5, , ,000 Bal. 19, ,140 = 10, ,000 (c) + 3, ,450 Bal. 19, , ,450 = 13, ,000 (d) 1, ,000 Bal. 18, , ,450 = 13, ,000 1,000 (e) + 6, ,927 (Service Income) (Rent Expense) Bal. 25, , ,450 = 13, , ,927 1,000 (f) (Supplies Expense) Bal. 25, , ,450 = 13, , ,927 1,301 (g) 1, ,200 Bal. 24, , , ,450 = 13, , ,927 1,301 (h) Bal. 23, , , ,450 = 13, , ,927 1,650 (i) (Gas and Oil Expense) Bal. 23, , , ,450 = 13, , ,927 1,868 (j) + 3, ,603 (Service Income) Bal. 23, , , , ,450 = 13, , ,530 1,868 (k) + 4, ,612 (Service Income) (Utilities Expense) Bal. 28, , , , ,450 = 13, , ,142 1,868 (l) 3, ,958 (Wages Expense) Bal. 24, , , , ,450 = 13, , ,142 5,826 (m) 1, ,250 Bal. 23, , , , ,450 = 13, ,000 1, ,142 5,826 See the summary of accounts on the next page Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 25

20 Problem 1-4B (concluded) Left Side of Equals Sign: Accounts Receivable Prepaid Insurance Truck Equipment Right Side of Equals Sign: $23,341 Accounts Payable $13,668 3,603 T. Carter, Capital 25,000 1,200 T. Carter, Drawing 1,250 15,140 Revenue 15,142 3,450 Expenses 5,826 $46,734 $46, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

21 SOLUTIONS TO ACTIVITIES CONSIDER AND COMMUNICATE Suggested Response Explain to your friend that the separate entity concept demands a separate business checking account. The separate entity concept states that a business is treated as a separate economic or accounting entity. The business stands by itself, separate from its owners, creditors, and customers. Commingling and confusion of personal and business funds is one of the most common reasons that small businesses fail. CRITICAL THINKING Suggested Response To: From: J. Perrault, Supervisor Your name Date: Subject: July 31, 20 Calculations for Richter Co. The calculations you requested are as follows: 1. The checkbook balance of cash for Richter Company of $13,364 does tie to (match) the account balance. The following calculation confirms this: Total assets of $43,560 minus noncash assets totaling $30,196 (Professional Equipment of $24,375 plus Office Equipment of $3,896 plus Prepaid Insurance of $1,925) = $13, Richter Company s owner s equity is $35,618. The following calculation confirms this: Total assets of $43,560 minus liabilities of $7,942 = $35, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 27