Chapter 2 Financial Statements

1
Chapter 2 Financial
Statements and
Accounting
Transactions
Questions
1. The four financial statements are: the income statement, the balance sheet, the statement of
ownersequity, andthe cashflowstatement.
2. An income statement reports on the businesss performance during the period. It shows
whether the businessearneda net income(also called profit). The statementdoes not simply
report the amount of net incomeor loss but lists the types and amounts of the revenuesand
expenses.
3. A revenue is an inflow of assets received in exchange for goods or services provided to
customers as part of the major or central operations of the business. A revenue also may
occuras a decreasein liabilitiesas whena serviceor productis deliveredhavingbeenpaid for
in advance.
4. An income statement user must know what time period is covered to judge whether the
companys 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
whetherthey wereearnedover a week,a month,or a year.
5. A businesss equity is increasedby investmentsinto the businessmade by the owner and by
net income. It is decreasedby withdrawalsmadeby the owner and by a net loss, which is the
excessof expensesoverrevenues.
6. The balancesheet reports on the financial positionof a businessat a specific point in time. It
is often called the statement of financial position. It provides information that helps users
understanda companysfinancial status. The balancesheet lists the typesand dollar amounts
of assets,liabilities, andequityof the business.
7. (a) Assets are probable future economicbenefits obtained or controlled by a particular entity
as a result of past transactions or events. (b) Liabilities are probable future sacrifices of
economicbenefits 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) The term net assetsmeansthe samething as equity, whichis also determined
as assetsless liabilities.
8. The equity section of the balance sheet reports a Carol Finlay, Capital account. The presence
of the owners capital account indicates that Finlay Interiors has been organized as a sole
proprietorship.
9. The objectivity principle requires financial statementinformationto be supportedby evidence
Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.
Solutions Manual for Chapter 2
other than someones opinion or imagination (such as source documents). This principle
increasesthe reliabilityof the financialstatements.
10. This treatmentis requiredby the cost and going-concernprinciples.
11. The revenue recognition principle provides guidance that managers and auditors need for
knowing when to recognize revenue. For example, if revenue is recognized too early, the
incomestatementreportsincomeearlier than it shouldand the businesslooksmoreprofitable
than it really is. On the other hand, if the revenue is not recognized on time, the income
statement shows lower amounts of revenue and net income than it should and the business
looksless profitablethanit really is. Basically, this principlerequiresrevenueto be recognized
whenit is earnedand can be measuredreliably. The amountof revenueshouldequal the value
of the assetsreceivedfromthe customers.
QUICK STUDY
Quick Study 2-1
1.
2.
3.
4.
5.
6.
7.
SP
C
P
SP
C
C
P
Quick Study 2-2

a. Business entity principle
b. Revenue recognition principle
c. Cost principle
Quick Study 2-3
1.
2.
3.
4.
5.
Revenue Recognition
Objectivity and Cost
Business Entity
Going Concern
Monetary Unit

Quick Study 2-4

Monetary
Unit
1 Delco performed work for a client located in

. China and collected 8,450,000 RMB (Chinese
currency), the equivalent of about
$1,320,000 Canadian. Delco recorded it as
8,450,000.
Revenue
2 Delco collected $180,000 from a customer
Recognition . on December 20, 2011 for work to be done
in February, 2012. The $180,000 was
recorded as revenue during 2011. Delcos
year end is December 31.
Going
Concern
3 Delcos December 31, 2011 balance sheet

. showed total assets of $840,000 and
liabilities of $1,120,000. The income
statement for the past 6 years has shown a
trend of increasing losses.
Cost
4 Included in Delcos assets was land and

. building purchased for $310,000 and
reported on the balance sheet at $470,000.
Objectivity
5 Delcos bank manager wants to verify the

. revenues and has asked for the sales
receipts. Delco says that they do not issue
receipts but call customers and advise them
of the amount owing.
Business
Entity
6 Delcos owner, Tom Del, consistently buys

. personal supplies and charges them to the
company.
Quick Study 2-5

a. Owners equity
=$ 75,000
$ 34,500
b. Liabilities =$300,000
$ 85,500
$214,500
c. Assets
=$187,500
+$ 95,400
$ 40,500 =
=
=

$282,900
Quick Study 2-6
a. Owners equity
=$374,700
$252,450
=$122,250
$126,000 =
$
24,900
c. Assets
=$ 37,650
+$112,500 =
$150,150

5
5
Fundamental Accounting Principles, Twelfth Canadian
Edition
Quick Study 2-7

a.
b.
Allin Servicing
Allin Servicing
Income Statement
Income Statement
Month ended April 30, 2011
Month ended May 31, 2011
Revenues
$300
Revenues
$135
Expenses
125
Expenses
85
Net income (loss)
175
Net income (loss)
$ 50
Allin Servicing
Allin Servicing
Statement of Owner's Equity
Tim Allin, capital, April

1
$ 50
Add: Investments by
owner
$ 30
Net income
175
Total
Less: Withdrawals by owner
Tim Allin, capital, May 1

Add: Investments by
owner
$240
$ 60
Net income
205
$255
1
50 $110
Total
350

75
5
Tim Allin, capital, April 30
$240
Allin Servicing
Balance Sheet
April 30, 2011
Assets
Cash
Equipment
Liabilities
$ 60
205
Accounts payable
$ 25
Owner's equity
Tim Allin, capital
240
Total liabilities and

Total assets
$26
5
owner's equity
$265

Quick Study 2-8

1. $20,000 Assets - $15,000 Liabilities = $5,000 beginning capital on
January 1, 2011
2. $5,000 + $3,000 + $8,000 - $4,000 = $12,000 ending capital on
December 31, 2011
(Beginning Capital + Investments + Net Income
Withdrawals = Ending Capital)
Quick Study 2-9
The source documents include:
c. Telephone bill
d. Invoice from supplier
g. Bank statement
h. Sales invoice
Quick Study 2-10
Assets
Liabilitie +
s
Equity
a.
Increase/Decrease
b.
Increase
c.
Decrease
d.
e.
Increas
e
Decrea
se
Increase
Decrease
Decrease
Decrease
Quick Study 2-11

c
1.
Supplies.......................... $1
0
2.
Supplies expense.................. 22

3.
Accounts receivable.............. 25
4.
Accounts payable.................. 12
5.
Equipment............................. 40
6.
Tim Roadsters withdrawals 35

in April...................................
7.
Notes payable....................... 30
8. Utilities expense............... 10
9. Furniture................................. 20
10 Fees earned............................ 70
.
11 Rent revenue.......................... 35
.
12 Salaries expense.................... 45
.
13 Tim Roadsters investments 60

. in April....................................
a+ 14 Net income*........................... 28
b
.
*Calculated as: 70 + 35 22 10 45 = 28

Quick Study 2-12

1 Total revenues...................
.
70 + 35 = 105
2 Total operating expenses.........

.
22 + 10 + 45 =
77
3 Net income...............................
.
105 77 = 28
4 Total assets..............................
.
10 + 25 + 40 +
20 = 95
5 Total liabilities..........................
.
12 + 30 = 42
6 Tim Roadster, capital (April 30,

. 2011).......................................
60 35 + 28 =
53
7 Total liabilities and owners

. equity.......................................
42 + 53 = 95
Quick Study 2-13

d
1. Net loss..........................
2 Income statement
2. Rent expense.......................
2 Income statement
2
3. Rent payable........................
4. Accounts receivable.............
1
4
5. Joan Bennishs investments

in May..................................
3 Statement of owners
0 equity
6. Interest revenue...................
2 Income statement
7. Joan Bennish, capital, May 1,

2011.....................................
equity

10
8. Repair supplies................
9. Notes payable.......................
2
5
d 10 Joan Bennishs withdrawals

. in May...................................
equity
a 11 Truck.....................................
.
1
5
d 12 Consulting fees earned..........

.
1 Income statement
8
c 13 Joan Bennish, capital, May

. 31, 2011................................
a 14 Cash......................................
.
2
0
Quick Study 2-14

BENNISH CONSULTING
Income Statement
For Month Ended May 31, 2011
Revenues:
Consulting fees earned..........
Interest revenue....................
Total revenues.......................
Operating expenses:
Rent expense........................
Net loss.....................................

$18
2
$20
22
$ 2
10
11
Quick Study 2-14 (concluded)

BENNISH CONSULTING
Statement of Owners Equity
Joan Bennish, capital, May 1....
Add:.....Investments by owner
Total ..................................
Less: Withdrawals by owner....
Net loss.........................
Joan Bennish, capital, May 31. .
$ 0
30
$30
$5
2
7
$23
BENNISH CONSULTING
Balance Sheet
May 31, 2011
Assets Liabilities
Cash..........................
Accounts receivable....
Repair supplies..........
.............................
$20
14
5
Owners Equity
Truck.........................
15
........................ 23
Total assets...............
$54
Rent payable..........
Notes payable.........
Total liabilities........
$ 6
25
$31
Joan Bennish, capital

owners equity....

$54
11
12
EXERCISES
Exercise 2-1 (10 minutes)
a) $80,000 Revenue $65,000 Expenses = $15,000 Net Income
b) $92,000 Revenue $149,000 Expenses = $57,000 Net Loss
c) $86,000 Ending Equity - $10,000 Beginning Equity = $76,000 Net
Income
(no Withdrawals and no Investment)
d) $25,000 Beginning Equity + $40,000 Investment $52,000 Ending

Equity = $13,000 Net Loss
(no Withdrawals)
(a)
Answers
Proofs:
Owners equity,
January 1..........................
(b)
(c)
(d)
(e)
$) $36,00 $12,00 $21,00 $92,00

(24,750
0
0
0
0
$
0
$
0
$
0
$ $92,00
0
0
Owners investments
during the year.........
Net income (loss) for
the year............................
60,000 36,000 31,500 37,500 150,00

0
15,75
0
40,50
0
(4,50) 21,000
0
(8,000)
Owners withdrawals
during the year ........ (24,750) (27,00) (15,00) (15,75) (63,00)

12
13
Owners equity,
$51,000 $49,50 $12,00 $42,75 $171,0
December 31....................
0
0
0
00

13
14

THE DOBBS GROUP
Income Statement
For Month Ended November 30, 2011
Revenues:
Operating expenses:
Salaries expense................... $6,000
Rent expense........................
2,550
Telephone expense............
1,680
Utilities expenses..............
660
Total operating expenses....
Net income................................
$18,000
10,890
$ 7,110

THE DOBBS GROUP
Jean Dobbs, capital, November 1
Net income......................
7,110
Total ..................................
$
0
84,000
91,110
$91,110
3,360
$87,750
Analysis component:
The owner, Jean Dobbs, invested $84,000 of assets during

the month, which caused equity to increase. Also, net
income earned during the month was $7,110 also causing
equity to increase during November. The total increases in
equity during the month were a total of $91,110 ($84,000 +
$7,110).
NOTE: Students might point out that equity decreased by a
total of $3,360 in withdrawals which in combination with the
total increase of $91,110 caused a net increase in equity of
$87,750.

14
15

THE DOBBS GROUP
Balance Sheet
November 30, 2011
Assets Liabilities
Cash..........................$12,000
Accounts receivable.... 17,000
Office supplies........... 2,250
Automobiles............... 36,000
Office equipment........ 28,000
Total assets...............$95,250
Accounts payable.... $ 7,500

Owners Equity
Jean Dobbs, capital. 87,750
owners equity.... $95,250
Analysis component:
$87,750 (or 92.13% calculated as $87,750/$95,250 100) of

the total $95,250 assets are owned by Jean Dobbs, the owner
of The Dobbs Group.
EXCEL LEARNING SERVICES
Income Statement
For Month Ended July 31, 2011
Revenues:
Tutoring fees earned.............
Textbook rental revenue........
Total revenues....................
Operating expenses:
Office rent expense............... $2,500
Tutors wages expense..........
1,540
Utilities expense...............
580
Net loss.....................................

$4,200
300
$ 4,500
4,620
$
120
15
16

George Pelzer, capital, July 1...
Total ..................................
Less: Withdrawals by owner.... $ 1,000
Net loss.........................
120
George Pelzer, capital, July 31.
$ 7,400
1,200
$ 8,600
1,120
$ 7,480
Analysis component:
Withdrawals of $1,000 by the owner, George Pelzer, caused equity to
decrease during July, 2011. Also, the net loss of $120 caused equity
to decrease in July. The total decrease in equity during the month of
July was $1,120 (calculated as $1,000 + $120).
NOTE: Students might point out that equity increased by
$1,200 of owner investments which, in combination with the
total decrease of $1,120, caused a net increase in equity of
$80.
Balance Sheet
July 31, 2011
Assets Liabilities
Cash..........................$ 1,600
1,400
Supplies.....................
600
Furniture................... 1,800
...............
7,480
Accounts payable....
Owners Equity
George Pelzer, capital

16
17
Computer equipment. .
Total assets........................
2,200
$8,880
owners equity............
$8,880
Analysis component:
$1,400 or 15.77% (calculated as $1,400/$8,880 100) of the total
$8,880 assets held by Excel Learning Services are financed by debt.

17
18
Description
B 1. Requires every business to be accounted for separately

from its owner or owners.
D 2. Requires financial statement information to be
supported by evidence other than someones opinion or
imagination.
A 3. Requires financial statement information to be based on
costs incurred in transactions.
E 4. Requires financial statements to reflect the assumption
that the business will continue operating instead of
being closed or sold.
C 5. Requires revenue to be recorded only when the
earnings process is complete.
a.
Assets Liabilities=
Owners
Equity
Beginning of the year. . .$ 150,000
$60,000
=
........................$90,000
End of the year.............$240,000$92,000 = 148,000
Net increase in owners equity........................ $58,000
Net income..................................................... $58,000
(Because there were no additional investments or

withdrawals, the net income for the year equals the net
increase in owners equity.)
b. Net increase in owners equity....... $58,000
Add: Withdrawals (12 months @ $3,500)
Net income....................................$100,000
42,000
An alternative calculation:
$90,000 + x - $42,000 = $148,000; x = $100,000
c. Net increase in owners equity....... $58,000
Less: Additional investment........... 65,000
Net loss......................................... $ 7,000
$90,000 + $65,000 + x = $148,000; x = ($7,000) where the
negative represents a loss.
18
19
d. Net increase in owners equity....... $58,000

Gross increase in owners equity....$100,000
Net income.................................... $50,000
42,000
$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000
a.
If assets decreased by $5,000 during August, then
$20,000 + $5,000 = $25,000 Assets at August 1, 2011.
Therefore, Owners Equity at August 1, 2011 = $25,000 - $1,000 =
$24,000
b.
If liabilities increased by $3,000 during August, then
$1,000 + $3,000 = $4,000 Liabilities at August 31, 2011.
$16,000
Assets
Cash
a)
Total
s
Liabilities +
Owners
Equity
Accounts
Receivab
Office
Accounts
Noel Bridges,
+
le
+ Supplies = Payable +
Capital
+
$2,500
+ $2,500
2,500
2,500

19
20
b)
Total
s
c)
Total
s
2,500
+
+ $200
+ $200
200
200
600
2,500
+
600
3,100
200
200
3,100
3,100
200
200
3,100
d)*
Total
s
e)
Total
s
1,500
1,600
f)
Total
s
1,500
200
200
+
$1,250
$1,600
$1,250
$3,050
1,600
+ 1,250
$200
$200
$2,850
$3,050
*Note: For (d), since no exchange has occurred, no entry is

required.

20
21

Assets
Cash
Liabilitie +
s
Owners
Equity
Accounts
Parts
Receivabl
Supplie
Equipme
Accounts
+
e
+
s
+
nt
= Payable +
Janine
Commry,
Capital
a)
+ $7,000
+ $ 7,000
b)
- 2,500
- 2,500
Totals
$4,500
$ 4,500
c)
Totals
$4,500
d)
Totals
e)
Totals
+ $1,200
+ $1,200
$1,200
$1,200
+ $3,400
$4,500
$3,400
+ $ 3,400
$1,200
$ 950
$3,550
$ 4,500
$1,200
$7,900
$1,200
$7,900
$1,200
$ 7,900
+ $950
$3,400
$1,200
$950
f)*
Totals
g)
Totals
h)
Totals
i)
Totals
$3,550
$3,400
$1,200
$950
$1,200
$2,350
$1,200
$3,400
$1,200
$950
+ $1,400
$3,750
+ $ 1,400
$3,400
$1,200
$950
$2,700
$1,050
$7,900
$9,300
$ 2,700
$3,400
$1,200
$6,600
$950
$6,600
$6,600
*Note: For (f), since no exchange has occurred, no entry is

required.

21
22
Exercise 2-14: (15 minutes)

b.
c.
d.
e.
f.
g.
Office Supplies were purchased paying cash of $500.

Office Furniture was purchased paying cash of $8,000.
Completed work for a client on credit; $1,000.
Purchased office supplies on credit; $400.
Paid $250 to a creditor.
Collected $750 cash from a credit customer.

22
23

a) The business purchased land paying $3,000.
b) $400 of office supplies were purchased on credit (or on
account).
c) Paid $700 for the purchase of office supplies
d) $1,050 of revenue on account (or on credit) was earned.
e) Collected $1,000 cash for revenue performed.
f) Paid $400 to a creditor.
g) Collected $1,050 from a credit customer.
h) The owner invested $5,000 of land.
+Accounts + Equip-= Accounts+ Ellen Manson,
Explanation
Cash Receivable ment
Payable
Capital of Change
a. $25,000
$5,000
b. 1,300
Expense
$23,700
$5,000
c.
$23,700
d.
+6,000
+6,000
$11,000
$6,000
$11,000
$6,000
+$1,000
$1,000
f. 4,000
$20,200
h. +
250
Rent
$28,700
500
$11,000
Revenue
$29,200
+ 1,000
$6,000
$30,200
$6,000
$30,200
Revenue
+ 4,000
$1,000
$15,000
g. 1,200
Expense
$19,000
$1,300
$24,200
$24,200
Investment
$28,700
+ 500
e.
$30,000
1,200
$1,000
$15,000
$6,000
Wages
$29,000
250

23
24
$19,250
i.
$750
$15,000
$6,000
6,000
$13,250
j.
$29,000
6,000
$750
$15,000
$29,000
250
$13,000
$28,750
$750
$28,750
Revenue
($500 + $1,000)
$15,000
250
Withdrawal
$28,750
Expenses
=
Net loss
($1,300 + $1,200) =

$1,000
24
25
Exercise 2-17 (15 minutes) (Answers may vary.)

Possible examples include:
a. The business purchases office supplies (or some other
asset) for cash.
b. The owner withdraws cash (or some other asset) from the
business; also, the business incurs an expense paid with
cash.
c. The business incurs an expense on credit.
d. The business purchases equipment (or some other asset)
on credit.
e. The owner invests cash (or some other asset); or, the
business earns a revenue and accepts cash or an account
receivable.
f. The business pays an account payable (or some other
liability) with cash.
Assets
Cash
Liabiliti +
es
+ Accounts + Supplie + Equipme = Account + Annie Explanatio

Receivab s
nt
s
Deweer
n
le
Payable
d,
Capital
a)
b)
Total
s
d)
Owner
+$2,500 Investment
+ $2,500
+ $4,000
$4,000
+$4,000 Revenue
$
c)
Total
s
Owners Equity
$2,500
+ $150
$4,000
$150
$6,500
+ $150
$2,500
$150
$ 450

$6,500
$ 450 Sal.
Expense
25
26
Total
s
$3,550
$150
$2,500
$150
$6,050
$3,550
$150
$2,500
$150
$6,050
e)*
Total
s
f)
Total
s
$
1,400
$2,150
g)
Total
s
$ 1,400 Rent
Expense
$
$150
$2,500
$150
+ $2,000
$2,150
$2,000
$6,800
$4,650
+$2,000 Revenue
$150
$2,500
$150
$6,650
$6,800
*Note: For (e), since no exchange has occurred, no entry is

required.

26
27

Annie Deweerd Freelance Writing
Income Statement
For Month Ended March 31, 2011
Revenues:
Freelance writing revenue
$6,000
Operating expenses:
Salaries expense
Rent expense
450
1,40
0
Total operating expenses
1,85
0
Net income
$4,1
50

Annie Deweerd, capital, March 1

Add:
Investment by owner
Net income
$2,500
4,15
0

6,65
0
27
28
$6,6
50

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$2,1
50
Accounts payable
$
150
Accounts 2,00
receivable
0
Supplies
Equipment
150
2,50
0
Owners Equity
Annie Deweerd, capital
Total assets
$6,8
00
6,65
0
Total liabilities and owners $6,8

equity
00

28
29
Exercise 2-19 (concluded)

Analysis component:
a. Supplies of $150 were financed by accounts payable, a liability.
b. Equipment of $2,500 was financed by owner investment, an
equity transaction.
c. Cash of $2,150 and Accounts receivable of $2,000 were
financed by net income of $4,150. Net income includes the
equity transactions of revenues and expenses (revenues of
$6,000 less expenses of $1,850).
Assets
Cash
a)
+
$500
+$400
$500
Owner
+$15,500 Investment
+$15,000
c)
Total
s
Owners Equity
+ Accounts + Supplie + Equipme = Account + Pete

Explanatio
Receivab s
nt
s
Jong,
n
le
Payable
Capital
b)
Total
s
Liabiliti +
es
$400
+$400
$15,000
+$600
$400
$15,500
+$600
$500
$1,000
$15,000
$1,000
$15,500
$500
$1,000
$15,000
$1,000
$15,500
d)*
Total
s
e)
Total
s
+$550
$500
f)
Total
s
$550
+$550 Revenue
$1,000
$15,000
$1,000
+$600
$500
$1,150
$16,050
+$600 Revenue
$1,000
$15,000
$1,000

$16,650
29
30
g)
-$200
Total
s
$300
h)
-$250
Total
s
$50
-$200
$1,150
$1,000
$15,000
$800
$16,650
-$250 Adv.
Expense
$1,150
$1,000
$17,200
$15,000
$800
$16,400
$17,200

required.

30
31

Petes Yard Care
Income Statement
Revenues:
Yard care revenue
$1,150
Operating expenses:
Advertising expense
250
Net income
$
900
Petes Yard Care
Pete Jong, capital, March 1

Add:
Investment by owner
$15,500
Net income
900
16,40
0
$16,4
00
Petes Yard Care

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$
50
Accounts payable

31
32
800
Accounts 1,150
receivable
Supplies
Equipment
1,000
15,000
Owners Equity
Pete Jong, capital
16,40
0

Total assets
$17,20
0
owners equity
$17,2
00
Analysis component:
The $900 of net income does not represent cash because all of the
revenues ($550 + $600 = $1,150) were on account. The $250 of
advertising expense was paid in cash. The net income or net loss on
an income statement represents accrual net income (loss) as
opposed to a cash basis net income (loss). Recall that accrual basis
net income represents revenues and expenses that occurred
regardless of when cash is actually received/paid.

32
33

Assets
Cash
Bal.
$1,200
+$1,000
-$1,000
Total
s
$5,000
$200
b)
-$2,000
Total
s
$3,000
c)
+$700
Total
s
$3,700
d)
-$500
Total
s
$3,200
e)
-$1,200
Total
s
$2,000
f)
-$600
Total
s
$1,400
g)
Total
s
Owners Equity
+ Accounts + Supplie + Equipme = Account +

Otto
Receivab s
nt
s
Ingles,
le
Payable
Capital
$4,000
a)
Liabiliti +
es
$900
$7,500
$4,000
$9,600
$900
$7,500
$4,000
$9,600
-$2,000
$200
$900
$7,500
$2,000
$9,600
+$700 Revenue
$200
$900
$7,500
$2,000
$10,300
-$500 Wage
Exp.
$200
$900
$7,500
$2,000
$9,800
-$1,200 Rent Exp.
$200
$900
$7,500
$2,000
$8,600
-$600 Utilities
Exp.
$200
$900
$7,500
$2,000
+$400
$1,400
Explanati
on
$600
$8,000
+$400 Revenue
$900
$7,500
$2,000
$8,400
h)*
33
34
Total
s
$1,400
$600
$900
$10,400
$7,500
$2,000
$8,400
$10,400
*Note: For (h), since no exchange has occurred, no entry is

required.

34
35

Ottos Wrecking Service
Income Statement
Revenues:
Wrecking revenue
$1,100
Operating expenses:
Rent expense
$ 1,200
Wages expense
500
Utilities expense
600

Net loss
2,30
0
$1,2
00

Otto Ingles, capital, July 1
$ 9,600
Less: Net loss
1,200
$
8,400

Balance Sheet
July 31, 2011
35
36
Assets
Cash
Accounts
receivable
Supplies
Equipment
Liabilities
$1,400
Accounts payable
$
2,000
600
900
7,500
Owners Equity
Otto Ingles, capital
8,400

Total assets
$10,40
0
owners equity
$10,4
00
Analysis component:
$8,400 or 80.77% (calculated as $8,400/$10,400 100) of the
assets are financed by Otto Ingles, the owner. $2,000 or
19.23% (calculated as $2,000/$10,400 100) of the assets are
financed by debt.

36
37
PROBLEMS
Problem 2-1A (20 minutes)
Year
2011
Beginning
capital
+
Owner
investment
+ Net
(loss)
income
2010
125,0001
0
(5,000)
Owner
withdrawals
= Ending capital
120,000
2009
28,0003
10,000
175,000
60,0005
78,000
42,000
125,0002
28,0004
Note: The superscripts show the order in which the answers were
calculated.
Calculations:
1. $120,000 + 5,000 = $125,000
2. $125,000 (The beginning capital balance for one period is the
ending capital balance of the previous period)
3. $125,000 + $78,000 - $175,000 = $28,000
5. $28,000 + $42,000 - $10,000 = $60,000
BEE-CLEAN
Income Statement
For Year Ended July 31, 2011
Revenues:
Service revenue.....................
$142,000
37
38
Repair revenue......................
Total revenues....................
Operating expenses:
Wages expense..................... $52,000
Rent expense........................ 24,000
Supplies expense................... 11,400
Utilities expense....................
9,800
Interest expense....................
500
Net income................................

6,000
$148,000
97,700
$ 50,300
38
39
Problem 2-2A (concluded)

BEE-CLEAN
Bee Cummins, capital, August 1, 2010
Net income...................... 50,300
Total ..................................
Bee Cummins, capital, July 31, 2011
$79,300
$
-050,300
$129,600
34,000
$95,600
BEE-CLEAN
Balance Sheet
July 31, 2011
Assets
Cash........................
Accounts receivable.
Supplies..................
Prepaid rent............
Office equipment.........
Furniture.................
Total assets.............
$
11,
800
56,00
0
2,400
12,00
0
29,200
19,0
00
$130,
400
Liabilities
Accounts payable...
Notes payable........
Total liabilities . . . .
$
14,
800
20,0
00
$
34,800
Owners Equity
Bee Cummins,
capital...............
95,60
0

owners equity. . . $130,4
00

39
40
Problem 2-3A (60 minutes) Part 1

BRANDON DELIVERY SERVICES
Balance Sheet
December 31, 2010
Assets
Liabilities
Cash...................$ 26,250
Accounts payable.....
$
3,750
Accounts receivable
14,250
Office supplies.....
2,250
Trucks................. 27,000
Owners Equity
Office equipment. 69,000
Jess Brandon, capital
1
135,000
Total assets
$138,750
owners equity.....
$138,750
_____________________
Calculations:
1. $138,750 $3,750
unknown amount)
$135,000

(calculation
of
40
41
Problem 2-3A (concluded) Part 1

Balance Sheet
December 31, 2011
Assets
Liabilities
Cash................... $ 9,375
$
18,750
Accounts receivable
11,175Notes payable
.......... 52,500
1,650
Total liabilities...... $71,250
Trucks................. 27,000
Land................... 22,500
Owners Equity
Building.............. 90,000
2
163,950
Total assets.........$235,200
owners equity.....
........$235,200
Calculations:
2. $235,200 $71,250 = $163,950
Part 2
Calculation of net income for 2011:
Owners equity, December 31, 2011.....
$163,950
135,000
Increase in owners equity during 2011
$ 28,950
Less: Additional investment.................
17,500
Net increase in owners equity during 2011,
apart from new investment..............
$ 11,450
Add: Withdrawals ($1,500 12)...........
18,000
Net income earned in 2011..................
$ 29,450
OR
$135,000 + $17,500 + x - $18,000 = $163,950; x =

$29,450

41
42
Analysis component:
Assets increased by $96,450 ($235,200 - $138,750). $67,500
of the increase in assets were financed by an increase in debt
(total liabilities went from $3,750 at December 31, 2010 to
$71,250 at December 31, 2011). The remaining $28,950
increase in assets ($96,450 - $67,500) resulted from equity
financing (equity increased to $163,950 at December 31,
2011 from $135,000 at December 31, 2010 because of
$17,500 owner investment plus $29,450 net income less
$18,000 of withdrawals during 2011).

42
43

Company A:
(a) Owners equity on December 31, 2010:
Assets....................................
Liabilities...............................
Owners equity.......................
$90,000
47,000
$43,000
(b)Owners equity on December 31, 2011:

Owners equity, December 31, 2010
..................................$43,000
Add: Owner investments................
Net income.......................
Less: Owners withdrawals.............
10,000
15,000
5,000
$63,000
(c) Amount of liabilities on December 31, 2011:

Assets....................................
$96,000
Owners equity.......................
Liabilities...............................
63,000
$33,000
Part 2
Company B:
(a) and (b)
Owners equity:
31, 2011
Assets....................................
Liabilities...............................
Owners equity.......................
Dec. 31, 2010

$70,000
45,000
$25,000
(c) Net income for 2011:

..................................$25,000
Add: Owner investments.........
Net income.......................
Less: Owner withdrawals.........
..................................$27,000
Dec.
$82,000
55,000
$27,000
3,000
?
6,000
Therefore, the net income must have been $5,000.

43
44
Problem 2-4A (continued) Part 3

Company C:
First, calculate the beginning balance of equity:
Dec. 31, 2010
Assets................................... $58,000
Liabilities..............................
28,000
Owners equity...................... $30,000
Next, find the ending balance of equity by completing this
table:
$30,000
Add:.........Owner investments
15,500
Net income......................
18,000
Less: Owner withdrawals.......
7,750
$55,750
Finally, find the ending amount of assets by adding the
ending balance of equity to the ending balance of the
liabilities:
Dec. 31, 2011
Liabilities.............................. $38,000
Owners equity......................
55,750
Assets................................... $93,750
Part 4
Company D:
First, calculate the beginning and ending equity balances:
Dec. 31, 2010 Dec. 31, 2011
Assets................................... $160,000
$250,000
Liabilities..............................
76,000
128,000
Owners equity...................... $84,000
$ 122,000
Then, find the amount of owner investments during 2011 by
completing this table:
.................................$84,000
Add: Owner investments........
Net income......................
?
24,000
0
44
45

...............................$122,000
Therefore, the owner investments must have been $14,000.

45
46

Company E:
First, calculate the balance of equity as of December 31,
2011:
Assets...................................
Liabilities..............................
Owners equity......................
$225,000
150,000
$ 75,000
Next, find the beginning balance of equity by completing this

table:
Add: ........Owner investments
Net income......................
$
?
9,000
36,000
18,000
$75,000
Therefore, the beginning balance of equity was $48,000.

Finally, find the beginning amount of liabilities by
subtracting the beginning balance of equity from the
beginning balance of the assets:
Assets...................................
Owners equity......................
Liabilities..............................
Dec. 31, 2010

$246,000
48,000
$ 198,000

46

47
Problem 2-5A (45 minutes) Parts 1 and 2

Assets
Liabilities
Owners Equity
Dan
+ Accounts + Office + Office +

Notes+ Murray,Explanation
Cash Receivable
Supplies Equipment
of Changes
= Accounts
Building Payable
(a) +$160,000
+$60,000
Investment
(b) 100,000
+$600,000
Bal. $ 60,000
$60,000 $600,000
(c)
8,000
+ $8,000
Bal.
$ 52,000
$8,000 $60,000 $600,000
$220,000
(d)
+72,000
+$72,000
Bal. $ 52,000
$8,000
$132,000 $600,000
$ 220,000
(e)*
Bal. $ 52,000
$8,000
$132,000
$600,000
$220,000
(f)
+$3,000
Revenue
Bal. $ 52,000
$3,000 $8,000
$132,000 $600,000
$223,000
(g)
2,000
Advertising Expense
Bal. $ 50,000
$3,000 $8,000
$132,000 $600,000
$221,000
(h) +
4,000
Service Revenue
Bal. $ 54,000
$3,000 $8,000
$132,000 $600,000
Payable
+
+$500,000
$500,000
Capital
$220,000
$ 220,000
$500,000
$72,000
$500,000
$72,000
$500,000
+3,000
$72,000
$500,000
$72,000
2,000
$500,000
+
$72,000
Service
4,000
$500,000
39
48
$225,000
(i)
4,000
Bal. $ 50,000
$225,000
(j) +
1,000
Bal. $ 51,000
$225,000
(k)
7,000
Wages Expense
Bal. $ 44,000
$218,000
(l)
3,600
Withdrawal
Bal. $ 40,400
$3,000
$8,000
$132,000
4,000
$600,000
1,000
$2,000
$8,000
$132,000
$600,000
$68,000
$500,000
$68,000
$500,000
$2,000
$8,000
$132,000
$600,000
$68,000
7,000
$500,000
3,600
+$2,000 +$8,000 +$132,000 +$600,000=$68,000 +$500,000+ $214,400

$782,400
*NOTE: For (e), since no exchange has occurred, no entry is required.
$782,400
49
Problem 2-5A (continued)

Part 3
Murray Enterprises
Income Statement
Revenues:
Service revenue
$7,000
Operating expenses:
Wages expense
$7,000
Advertising expense
2,00
0
9,000
Net loss
$2,000
Murray Enterprises
Dan Murray, capital, March 1
Add: Investment by owner
220,0
00
Total
Less: Withdrawal by owner
$220,0
00
$ 3,600

49
50
Net loss
2,00
0
5,600
$214,4
00
Murray Enterprises
Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$
40,400
Accounts
receivable
2,000
Office supplies
8,000
Office
equipment
Building
Total assets
Accounts payable
$
68,000
Notes payable
500,00
0
Total liabilities
$568,0
00
132,00
0
600,00
0
$782,4
00
Owners Equity
Dan Murray, capital
$214,4
00
Total liabilities and owners

equity
$782,4
00

50
51

Analysis component:
Assets result from a combination of debt and equity financing (A = L
+ E). Murray Enterprises total assets of $782,400 resulted from
incurring $568,000 in liabilities ($68,000 in accounts payable plus
$500,000 of notes payable). $568,000/$782,400 x 100 = 72.597% or
73%. The remaining 27% of the assets were financed by equity
transactions (owner investment and net income or loss less
withdrawals made by the owner).

51

42
Edition
52

Assets
+ Accounts
+
Cash Receivable
= Liabilities
+
Office
= Accounts +
Supplies Payable
Owners Equity
Bev Ng,
Explanation
Capital
of
Change
Apr.1
1
3
5
Expense
8
Revenue
12
Revenue
15
Expense
20
22
Revenue
23
28
29
30
Expense
30
Expense
30
Expense
30
+$120,000
6,400
3,360
1,600
+
+ $3,360
9,200
+$6,000
1,700
+6,000
+5,600
2,000
6,000
+5,600
5,600
+ 2,000
+$120,000
6,400
Investment
Rent Expense
1,600
Cleaning
9,200
Consulting
6,000
Consulting
1,700
Salaries
5,600
Consulting
+ $2,000
2,000
120
120
Advertising
400
400
Telephone
960
960
Utilities
1,700
Salaries
1,700

52
53
Expense
30
2,400
$120,280 +$
$125,640
$5,360= $

120
2,400
$125,520
$125,640
53
Withdrawal
54

KEEP-SAFE
Income Statement
For Month Ended April 30, 2011
Revenues:
Consulting services revenue.....
Operating expenses:
Rent expense...........................
Salaries expense......................
Cleaning expense.....................
Utilities expense......................
Telephone expense..................
Advertising expense.................
Total operating expenses.....
Net income...................................
$20,800
$6,400
3,400
1,600
960
400
120
12,880
$ 7,920
KEEP-SAFE
Bev Ng, capital, April 1................
Add: ...........Investments by owner
Net income............................
127,920
Total.........................................
Less: Withdrawals by owner..........
Bev Ng, capital, April 30...............
$
0
$120,000
7,920
$127,920
2,400
$125,520
KEEP-SAFE
Balance Sheet
April 30, 2011
Assets
Liabilities

54
55
Cash...................$120,280
Office supplies..... 5,360
Total assets........$125,640
Accounts payable.........$
120
Owners Equity
Bev Ng, capital............ 125,520
owners equity.......... $125,640
Analysis component:
99.9% of Keep-Safes total assets at April 30, 2011 were
financed by equity ($125,520/$125,640 x 100 = 99.904%).
Specifically, equity transactions that created assets were
$120,000 invested by the owner during the month plus net
income of $7,920 less owner withdrawals of $2,400. The
sum of these three equity transactions resulted in a net
increase in equity of $125,520 (since there was a $0
beginning balance in equity). Only $120 or 0.1% of the
total assets were financed by debt ($120/$125,640 x 100 =
0.0955% or 0.1%).

55

56
Cash
Bal
.
Oct.
31
$80,0
00
Nov. 1
-5,600
Bal
.
$74,4
00
3
+21,6
00
21,60
0
Bal
.
$74,4
00
5
Bal
.
Bal
.
Office
Equip.
Electric
al
Equip.
Account
s
Payable
Larry
Power,
Capital
$7,000
$1,900
$28,000
$14,000
$18,000
$112,900
Explanation
of Change
-5,600 Rent expense

$7,000
$1,900
$28,000
$14,000
$18,000
$107,300
Owner
+21,600 investment
$7,000
$1,900
+
$28,000
+
$6,400
$28,000
$42,000
$24,400
$128,900
$28,000
$42,000
$24,400
$128,900
+1,800
$7,000
$3,700
+2,00
0
$74,6
00
Office
Supplies
-1,800
$72,6
00
Accounts
Receivab
le
Electrical fees
+2,000 earned
$7,000
$3,700
$28,000
+7,600
$42,000
$24,400
+7,600
$130,900
45
57
Bal
.
$74,60
0
15
Bal
.
$7,000
$3,700
$35,600
$42,000
$32,000
$130,900
Electrical fees
+6,000 earned
+6,000
$74,6
00
$13,000
$3,700
$35,600
$42,000
$32,000
$136,900
$74,6
00
$13,000
$3,700
$35,600
$42,000
$32,000
$136,900
*16
Bal
.
18
Bal
.
+1,000
$74,6
00
20
Bal
.
24
28
Bal
.
30
$4,700
$35,600
$42,000
-7,600
$67,0
00
Bal
.
$13,000
+1,000
$33,000
-7,600
$13,000
$4,700
$35,600
$42,000
$25,400
$67,0
00
$14,200
+
6,000
-6,000
$73,0
00
$8,200
$136,900
Electrical fees
+1,200 earned
+1,200
-4,400
$136,900
$4,700
$35,600
$42,000
$25,400
$138,100
$4,700
$35,600
$42,000
$25,400
$138,100
-4,400 Salaries expense
58
Bal
.
$68,6
00
30
Bal
.
$4,700
$35,600
$42,000
$25,400
$133,700
-1,400
$67,2
00
30
$8,200
-1,400 Utilities expense

$8,200
$4,700
$35,600
$42,000
$25,400
$132,300
Owner
-1,400 withdrawals
-1,400
$65,8
00
$8,200
$4,700
$156,30
0
$35,600
$42,000
$25,400
$130,900
=
$156,300
*Note: For November 16, since no exchange has occurred, no entry is required.
59

Analysis component:
Revenue is not recorded on November 28 because the
revenue was actually earned on November 15. The revenue
recognition principle requires that revenue be recorded when
it was incurred (when the economic exchange occurred), on
November 15. Cash is being collected on November 28 and is
recorded as a reduction of the asset, accounts receivable,
that was realized on November 15.
Problem 2-8A
POWER ELECTRICAL
Income Statement
Revenues:
Electrical fees earned.................
Operating expenses:
Rent expense.............................
Salaries expense........................
Utilities expense .......................
Total operating expenses.........
Net loss..........................................
$2,200
$9,200
$5,600
4,400
1,400
11,400
POWER ELECTRICAL
Larry Power, capital, November 1....
Add: Investments by owner.............
Total ...........................................
$134,500
Less: Withdrawals by owner............
Net loss....................................
Larry Power, capital, November 30. .
$112,900
21,600
$1,400
2,200

3,600
$130,900
59
60

POWER ELECTRICAL
Balance Sheet
November 30, 2011
Assets
Liabilities
Cash...................$65,800 Accounts payable

...........$25,400
Accounts receivable
8,200
Owners Equity
Electrical equipment
42,000Larry Power, capital
......... 130,900
Total assets.........$156,300
owners equity $156,300
Analysis component:
Power Electrical incurred a net loss of $2,200 for the month
ended November 30, 2011. Therefore, instead of helping to
finance assets, the November operating activities had a
negative impact on equity. Equity did increase during
November but because of an additional investment by the
owner. As a sole proprietor, a goal is to increase equity
because of positive earnings; not through owner investment.
Inco
me
Balance
Stmn
Sheet
t
Tota Tot
Net
l
al Equi Inco
Ass Liab ty
me
ets
.
Owner invests cash..... +
+
1
Sell services for cash...
2
60
61
Acquire services on
3 credit..........................
Pay wages with cash. . .
4
Owner withdraws cash.
5
Borrow cash with note
6 payable.......................
Sell services on credit.
7
Buy office equipment
8 for cash......................
Collect receivable from
9 (7)..............................
1 Buy asset with note
0 payable.......................
+/
+/
+

61
62
Problem 2-1B (20 minutes)

2012
2011
146,0001
Beginning
capital
+
Owner
investment
2010
35,0003
income
183,000
163,000
Owner
withdrawals
69,000
52,000
= Ending capital
260,000
+ Net
(loss)
146,0002
0
50,000
(15,000)5
0
35,000
Note: The superscripts show the order in which the answers

were calculated.
Calculations:
1. 260,000 + 69,000 183,000 = 146,000
2. The beginning capital of 146,000 for 2012 is the ending capital
from 2011.
3. 146,000 + 52,000 163,000 = 35,000
from 2010.
5. 35,000 50,000 = -15,000
FIREWORKS FANTASIA
Income Statement
For Year Ended December 31, 2011
Revenues:
Fees earned..........................
Rent revenue.........................
Total revenues....................
$ 70,000
33,000
$ 103,000
62
63
Operating expenses:
Wages expense.................
$46,000
Fireworks supplies expense. . 41,000
Utilities expense................... 17,800
Advertising expense..............
4,500
Office supplies expense........
1,800
Net loss.....................................

111,100
$ 8,100
63
64
Problem 2-2B (concluded)

FIREWORKS FANTASIA
Wes Gandalf, capital, January 1
$187,600
15,000
Total ..................................
Less: Withdrawals by owner.... $26,000
Net loss ........................
8,100
Wes Gandalf, capital, December 31
$168,500
$202,600
34,100
FIREWORKS FANTASIA
Balance Sheet
December 31, 2011
Assets
Cash.....................$ 14,000
Accounts receivable
Fireworks supplies 16,000
Office supplies...... 1,500
Tools.................... 9,000
Building................ 62,000
Land..................... 56,000
168,500
Office equipment. . 12,000
Total assets..........$177,500
..........$177,500
Liabilities
Accounts payable $
7,000
9,000
Owners Equity
Wes Gandalf, capital
. owners equity

64
65
Problem 2-3B (60 minutes) Part 1

STILLER CO.
Balance Sheet
December 31, 2010
Assets
Cash........................ $ 14,000
Accounts receivable
25,000
Office equipment.....
10,000
60,000
Machinery...............
134,5001
30,500
Total assets............. $139,500

................$139,500
Liabilities
Accounts payable............$
5,000
Owners Equity
Joseph Stiller, capital.......
owners equity..............
STILLER CO.
Balance Sheet
December 31, 2011
Assets
Cash................... $
15,000
Accounts receivable
10,000
Liabilities
Accounts payable...
30,000
Notes payable............ 260,000
12,500
60,000
Total liabilities....275,000
Machinery...........
Building...................
30,500
260,000
Land.......................
193,0002
65,000
Owners Equity
Joseph Stiller, capital.
$468,000
owners equity.......$468,000

65
66
_____________________
Calculations:
1. $139,500 $5,000 = $134,500 (calculation of unknown
amount)
2. $468,000 $275,000 = $193,000 (calculation of
unknown amount)

66
67
Problem 2-3B (concluded) Part 2

Owners equity, December 31, 2011..... $193,000
Owners equity, December 31, 2010..... 134,500
Increase in owners equity during 2011 $ 58,500
25,000
apart from new investment............... $ 33,500
Add: Withdrawals ($1,000 12)...........
12,000
Net income earned in 2011.................. $ 45,500
Analysis component:
Assets increased by $328,500 ($468,000 - $139,500).
$270,000 of the increase in assets were financed by an
increase in debt (total liabilities went from $5,000 at
December 31, 2010 to $275,000 at December 31, 2011).
The remaining $58,500 increase in assets ($328,500 $270,000) resulted from equity financing (equity increased
to $193,000 at December 31, 2011 from $134,500 at
December 31, 2010 because of $25,000 owner investment
plus $45,500 net income less $12,000 of withdrawals
during 2011).
Company V:
(a) and (b)
Calculation of owners equity:
12/31/10
Assets............................. $45,000
Liabilities......................... 30,000
Owners equity................. $15,000
12/31/11
$49,000
26,000
$23,000
(c) Calculation of net income for 2011:

..........................$15,000
Add: Owner investments. .
Net income.................
Less: Owner withdrawals. .
6,000
?
4,500
67
68
..........................$23,000

68
69
Problem 2-4B (continued)

Part 2
Company W:
(a) Calculation of equity at December 31, 2010:
Assets..............................
Liabilities..........................
Owners equity..................
$70,000
50,000
$20,000
(b)Calculation of equity at December 31, 2011:

...........................$20,000
Add: Owner investments. . .
Net income..................
Less: Owner withdrawals...
...........................$58,000
10,000
30,000
2,000
(c) Calculation of the amount of liabilities at December 31,

2011:
Assets..............................
Owners equity..................
Liabilities..........................
$90,000
58,000
$32,000
Part 3
Company X:
12/31/10
12/31/11
Assets..............................$121,500
$136,500
Liabilities.......................... 58,500
55,500
Owners equity..................$ 63,000
$ 81,000
............................$63,000
?
Net income.................. 16,500
0
............................$81,000
69
70

70
71

Part 4
Company Y:
Assets..............................
Liabilities..........................
Owners equity..................
Dec. 31, 2010

$82,500
61,500
$21,000

table:
Add:. . . .Owner investments
Net income.................
24,000
18,000
$21,000
38,100
$65,100

liabilities:
Liabilities..........................
Owners equity..................
Assets..............................
Dec. 31, 2011

$ 72,000
65,100
$137,100

71
72

Company Z:
2011:
Assets..............................
Liabilities..........................
Owners equity..................
$160,000
52,000
$108,000

table:
Net income..................
32,000
6,000
?
40,000
$108,000

Assets..............................
Owners equity..................
Liabilities..........................
Dec. 31, 2010

$124,000
42,000
$ 82,000

72

73
Problem 2-5B (45 minutes) Parts 1 and 2

Assets
Cash
(a)
(b)
Bal
.
(c)
Bal
.
(d)
+
$50,0
00
10,00
0
$40,0
00
9,000
$31,0
00
_______
$31,0
00
1,500
Bal $29,5
.
00
(f) _______
$29,5
00
+
Liabilities
+
$5,00
0
Bal
.
(e)
Bal
.
(g)
+ Accoun + Office + Office + Building = Accoun + Notes +

ts
ts
Receiva
Suppl
Equipm
Payabl
Payable
ble
ies
ent
e
+
$3,00
0
$3,00
0
______
Owners Equity
Judith
Grimm,
Capital
+
$55,00
0
_______
+
$120,0
00
$120,0
00
________
+
$110,0
00
$110,0
00
________
$120,0
00
________
$110,0
00
________
$55,00
0
_______
$110,0
00
________
$55,00
0
1,500
$53,50
0
+
3,000
+$2,0
00
$5,00
0
+
9,000
$14,0
00
+
3,200
$2,00
0
______
$17,2
00
_______
$120,0
00
________
+
$5,20
0
$5,20
0
______
$2,00
0
______
$17,2
00
_______
$120,0
00
________
$5,20
0
______
$110,0
00
________
$2,00
0
______
$17,2
00
_______
$120,0
00
________
$5,20
0
______
$110,0
00
________
Explanation of Changes
Investment
$55,00
0
_______
$56,50
0
+
Advertising Expense
Consulting
Revenue
Services
Consulting
Services
55
55
Bal
.
(h)
Bal
.
(i)*
Bal
.
(j)
Bal
.
(k)
Bal
.
(l)
Bal
.
5,400
$34,9 $3,00 $2,00
00
0
0
______ ______
2,750
$32,1 $3,00 $2,00
50
0
0
______ ______ ______
$32,1 $3,00 $2,00
50
0
0
+
______
1,200 1,200
$33,3 $1,80 $2,00
50
0
0
______ ______
900
$32,4 $1,80 $2,00
50
0
0
______ ______
1,900
$30,5 + $1,80 + $2,00 +
50
0
0
74
$17,2
00
_______
$120,0
00
________
$5,20
0
______
$110,0
00
________
$17,2
00
_______
$17,2
00
_______
$120,0
00
________
$120,0
00
________
$5,20
0
______
$5,20
0
______
$110,0
00
________
$110,0
00
________
5,400
$61,90
0
2,750
$59,15
0
_______
$59,15
0
_______
$17,2
00
_______
$120,0
00
________
$110,0
00
________
$59,15
0
_______
$17,2
00
_______
$120,0
00
________
$5,20
0
900
$4,30
0
______
$59,15
0
1,900
$17,2 + $120,0 = $4,30 + $110,0 + $57,25
00
00
0
00
0
$171,550
$110,0
00
________
$171,550
Note: For (i), since no exchange has occurred, no entry is required.
Revenue
Withdrawal
Wages Expense
75

Part 3
Southwest Consulting
Income Statement
Revenues:
Consulting services revenue
$8,400
Operating expenses:
Wages expense
$1,900
Advertising expense
1,500
3,40
0
Net income
$5,0
00
Judith Grimm, capital, January 1
Net income
$55,000
5,00
0
Total

60,00
0
$60,000
2,750
75
76
Judith Grimm, capital, December 31
$57,2
50
Balance Sheet
December 31, 2011
Assets
Cash
Liabilities
$
30,55
0
Accounts 1,800
receivable
Office supplies
2,000
Office equipment
17,20
0
Building
120,0
00
Accounts payable
Notes payable
Total liabilities
$171,
550
110,00
0
$114,3
00
Owners Equity
Judith Grimm, capital
Total assets
$
4,300
Total
liabilities
owners equity

57,250
and $171,5
50
76
77

Analysis component:
Assets result from a combination of debt and equity financing (A = L +
E). Southwests total assets of $171,550 resulted from incurring
$114,300 in liabilities ($4,300 in accounts payable plus $110,000 of
notes payable). $114,300/$171,550 x 100 = 66.628% or 67%. The
remaining 33% of the assets were financed by equity transactions
(owner investment and net income less withdrawals made by the
owner).

77

58
Edition
78
Cash
Jun
e
1
1
4
6
8
1
4
1
6
2
0
2
1
Liabili
Owners
Assets
= ties
+ Equity
Accoun
Clean
Accou
Andrew
+
ts
+ ing
= nts
+ Martin,
Receiv
Suppl
Payabl
Capital
able
ies
e
+
$120,0
00
4,500
2,400
+
$120,0
00
4,500
Investment
2,250
+
750
+
5,300
1,900
Advertising
Expense
Service
Revenue
Service
Revenue
Salaries
Expense
+
3,500
Service
Revenue
Rent Expense
+
$2,40
0
2,250
+
750
+
$5,300
1,900
+
5,300
Explanation of
Change
5,300
+
3,500

78
2
2
2
4
2
9
2
9
3
0
3
0
3
0
3
0
79
+
750
+
$750
+
825
3,500
+
3,500
375
120
525
1,900
2,000
$113,5 + $
80
+825
Service
Revenue
375
825 +
$117,555
$3,15 =
0
=

$375 +
120
525
1,900
2,000
$117,1
80
$117,555
79
Telephone
Expense
Utilities
Expense
Salaries
Expense
Withdrawal
80
Problem 2-6B (continued) Part 3

UNIVERSAL MAINTENANCE CO.
Income Statement
For Month Ended June 30, 2011
Revenues:
Maintenance services revenue .
Operating expenses:
Rent expense...........................
Total operating expenses......
Net loss........................................
$10,375
$4,500
3,800
2,250
525
120
11,195
$ 820

Andrew Martin, capital, June 1......
Add: Investments by owner...........
Total ........................................
Less: Withdrawals by owner.........
Net loss.............................
Total ........................................
Andrew Martin, capital, June 30. . . .
$
0
120,000
$120,000
$2,000
820
2,820
$117,180

Balance Sheet
June 30, 2011
Assets
Cash...................$113,580
375
Accounts receivable
Cleaning supplies
3,150
Liabilities
Accounts payable.......
825
Owners Equity
Andrew Martin, capital
117,180
Total assets.........$117,555

owners equity.........

80
81
.............$117,555

81
82

Analysis component:
99.7% of Universals total assets at June 30, 2011 were
$120,000 invested by the owner during the month less a
net loss of $820 less owner withdrawals of $2,000. The
0.319% or 0.3%).

82

June 3
0
July 1
Bal.
1
Bal.
1
Bal.
6
Bal.
8
Bal.
Bal.
Bal.
1
0
1
5
83
Asset
= Liabilit + Owners Equity
s
ies
Accoun
Office
Offic
Excav
Accoun
Explanation
+
+
+
+
=
+ Robert
ts
e
at.
ts
Cantu,
Cash
Receiva
Suppl
Equi
Equip
Payabl
Capital
of Change
ble
ies
p.
.
e
$ + $2,300 + $780 +$4,80 + $17,0 = $3,100 +
$27,780
6,000
0
00
60,000
60,000 Investment
$66,00
$87,780
0
500 Rent Expense

500
$65,50
$87,280
0
+
+ 3,200
_______
800
4,000
$64,70
$21,0
$6,300
$87,280
0
00
+
______
______
_______
500
500
$64,20
$1,28
$21,0
$6,300
$87,280
0
0
00
+
_____
______
______
+ 2,200 Excavating Fees
2,200
Earned
$66,40
$1,28
$21,0
$6,300
$89,480
0
0
00
______
_____
+
______
+
_______
3,800
3,800
$66,40
$1,28
$8,60
$21,0
$10,10
$89,480
0
0
0
00
0
______
+ 2,400
_____
______
______
______
Earned
$66,40
$4,700
$1,28
$8,60
$21,0
$10,10
$91,880
61
Bal.
1
7
0
______
______
$66,40
$4,700
0
2
______
3 3,800
Bal.
$62,60
$4,700
0
2
______ + 5,000
5
Bal.
$62,60
$9,700
0
2
+
2,400
8 2,400
Bal.
$65,00
$7,300
0
3
______
1 1,260
Bal.
$63,74
$7,300
0
3
______
1
260
Bal.
$63,48
$7,300
0
3
______
1 1,200
Bal.
$62,28 + $7,300 +
0
$8,60
0
______
$21,0
00
______
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
______
_______
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$96,880
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$3,20
0
+$8,60 +
0
$102,380
0
______
84
0
+
1,920
$3,20
0
______
00
______
0
+
1,920
$12,02
0
3,800
______
______
______
_______
$91,880
$91,880
+
5,000 Excavating
Earned
$96,880
1,260 Salaries Expense
$95,620
260 Utilities Expense
$95,360
$21,0 = $8,220 +
00
Fees
1,200 Withdrawal
$94,160
$102,380

Analysis component:
The revenue recognition principle states that transactions
are to be recorded when they occur when an economic
transaction takes place regardless of whether or not cash
has been received or paid. On July 15, there is an economic
exchange because even though Cantu Excavating did not
collect cash from the customer for work performed, Cantu did
receive a promise from the customer saying that the
customer would pay Cantu at a future date thus creating an
asset, an account receivable. Therefore an economic
exchange occurred the customer received a service and
Cantu received an asset called accounts receivable.
Problem 2-8B
CANTU EXCAVATING
Income Statement
Revenues:
Excavating fees earned .........
Operating expenses:
Salaries expense...................
Rent expense........................
Utilities expense ...................
Net income................................
$9,600
$1,260
500
260
2,020
$7,580
CANTU EXCAVATING
Robert Cantu, capital, June 30. . . .
Add: Investments by owner........
Net income...........................
Total.......................................
Less: Withdrawals by owner.......
Robert Cantu, capital, July 31......
$ 27,780
$60,000
7,580

67,580
$95,360
1,200
$94,160
85

CANTU EXCAVATING
Balance Sheet
July 31, 2011
Assets
Cash........................
$62,280
Accounts receivable
7,300
Office supplies.........
3,200
8,600
Excavating equipment
.................... 94,160
Liabilities
Accounts payable....... $ 8,220
Owners Equity
21,000Robert Cantu, capital
$102,380
owners equity....... $102,380
Analysis component:
The owner of Cantu Excavating invested $60,000 during the
month ended July 31, 2011 therefore having a positive impact
on equity. Equity increased during July largely because of
this additional investment by the owner. As a sole
proprietor, a goal is to increase equity because of positive
earnings; not through owner investment.
Owner invests cash.......
Balance
Sheet
Total Tot
Asset
al
s
Lia
b.
+
Inco
me
Stmn
t
Net
Equi Inco
ty
me
+

86
1
Pay wages with cash.....
2
Acquire services on
3 credit...........................
Buy store equipment for
4 cash.............................
5 payable........................
Sell services for cash....
6
Sell services on credit...
7
Pay rent with cash........
8
Owner withdraws cash. .
9
1 Collect receivable from
0
(7)...........................
+
+/
+
+/

87
ANALYTICAL AND REVIEW PROBLEMS

A&R Problem 2-1
TASKER AUTO REPAIR SHOP
Balance Sheet
November 30, 2011
Assets
Cash........................
Liabilities
$
6,300
Accounts payable...
$34,650
Accounts
47,25
receivable...............
0
Mortgage payable. .
28,350
Parts and supplies... 14,17

5
Total liabilities.....
$63,000
Equipment............... 22,05
0
Owners Equity
Jack Tasker, capital
26,775

Total assets............. $89,7
75
owners equity....
$89,775
Note to Instructors:
To reinforce students understanding of the nature of doubleentry bookkeeping and the accounting equation, it may be
advantageous to use this problem to demonstrate the
importance of recording transactions correctly because
neither double-entry bookkeeping nor the accounting
equation guarantee the correctness of information; they only
prove arithmetic accuracy.
Accordingly, the best way to explain this seemingly
88
impossible situation to beginning students in accounting is to

summarize both incorrect and the correct balance sheets in
detail.

89
A&R Problem 2-2

SUSAN HUANG, LAWYER
Income Statement
For Month Ended October 31, 2011
Revenues
Legal fees................................
$11,550
Operating expenses
Salaries expense...................... $2,940
Rent expense........................... 2,100
Supplies expense.....................
420
210
5,670
Net income...................................
$ 5,880
SUSAN HUANG, LAWYER
Susan Huang, capital, October 1. . .
$
0
Add:.............................................Investment by owner
$10,500
Net income............................. 5,880
Total.........................................
16,380
Susan Huang capital, October 31...
$16,380
SUSAN HUANG, LAWYER
Balance Sheet
October 31, 2011
Assets
Cash................... $
...............$ 1,050
Accounts receivable
Supplies..............
Law library..........
Furniture.............
............... 16,380
3,780
Liabilities
Accounts payable
2,100
1,050
8,400
2,100
Total assets......... $17,430
Owners Equity
Susan Huang, capital
owners equity.$17,430

90

91
A&R Problem 2-3
Income Statement
Revenues Expense
s
1.
$14,
000
Balance Sheet
Assets
$14,
000
2.
$5,
000
3.
$25,
000
4.
5.
Liabilities
$
500
$14,
000
$25,
000
5
00
5
00
Owners
Equity
5
00
500
6.
10,0
00
10,0
00
7.
5,00
0
5,0
00

92
8.
20
0
9.
2,0
00
1
0.
12,
000
45
1
1.
1
2.
2
00
900
45
45
9
00
900

93
Ethics Challenge
1. The accounting principle most relevant to this situation
is the revenue recognition principle.
The revenue
recognition principle provides guidance on when
revenue should be recognized on the income
statement. The principle states that revenue should be
recognized when earned. In this case, the earliest the
revenue could be considered earned is when the
product is shipped to customers.
2. If Sue is aware of the revenue recognition principle she
faces a dilemma of applying GAAP, which will result in
different revenue recognition than her supervisor is
advocating.
Sue faces a dilemma of following the
guidance of her profession or following her supervisor.
If Sue does not conform to her supervisors wishes she
may face the consequence of losing her job. If Sue
does what her supervisor requests she may face
internal anguish of doing something that she knows is
not professionally correct and which may negatively
affect any users of the financial statements that she is
helping produce.
3. Students
should
support
their
decision
with
appropriate reasons likely echoing the discussion in 2)
above.
4. Sue may be able to discuss the situation she is facing
with someone else in the firm and find support for not
following the supervisors directive. If the intent to
violate accounting principles is a commonplace
occurrence in the skateboard company Sue may wish to
seek employment elsewhere as the problem will likely
reoccur in the future.

94

68
Edition
FFS 2-1
Parts 1 and 2
June 2011
Assets
June 1
5
7
9
15
17
+ Account +
s
Cash
Receiva
ble
+20,0
00
+3,000
-1,500
+1,00
-1,000
0
-5,000
+2,00
0
= Liabiliti + Owners
Equ
ity
Office = Accoun +
Diane
ts
Towbell,
Equip.
Payabl
Capital
e
+6,000
+26,000
Explanation of
Change
in Owners
Equity
Owner
investment
+3,000 Service revenue
-1,500 Rent expense
-5,000 Wages expense
29
30 -1,500
Totals 15,00 +
0
+300
2,000 +
6,000 =
23,000
300 +
-300 Utilities
expense
22,700
23,000
95

96
97

FFS 2-1 (continued) Parts 1 and 2

July 2011
Assets
Liabiliti + Owners
Equi
ty
Diane
Explanation of
+ Accoun + Office = Accou +
ts
nts
Towbell,
Change
Cash
Receiv
Equip.
Payabl
Capital
in Owners
able
e
Equity
Balance 15,0
2,000
6,000
300
22,700
June 30
00
July 5
+3,500
8 +2,0
-2,000
00
9
-1,500 Rent expense
1,50
0
12
+1,800
+1,80
0
14
-1,000
1,00
0
15
2,50
0
17 +4,8
00
69
98
25 -600
1,70
0
31
2,00
0
Totals 12,5 +
00
-300
-300
31
-1,700
-2,000
3,500 +
23,800
7,800 =
800 +
23,000
23,800
Utilities
expense
Wages expense
Owner
withdrawals
99
FFS 2-1 (continued)

Part 3
GLENROSE SERVICING
Income Statement
Revenues:
Service revenue.....................
$5,000
Operating expenses:
Wages expense..................... $6,500
Rent expense........................
1,500
300
Net loss.....................................
$3,300
8,300
GLENROSE SERVICING
Diane Towbell, capital, June 1..
26,000
Total ..................................
Net loss ........................
Diane Towbell, capital, June 30
-0-
$26,000
$ -03,300
3,300
$22,700
GLENROSE SERVICING
Balance Sheet
June 30, 2011
Assets Liabilities
Cash..........................$15,000
Diane Towbell, capital
Total assets...............$23,000
Accounts payable.... $
300
Owners Equity
.................. 22,700
100
101
FFS 2-1 (continued) Part 3

GLENROSE SERVICING
Income Statement
Revenues:
Service revenue.....................
$8,300
Operating expenses:
Wages expense..................... $4,200
Rent expense........................
1,500
300
6,000
Net income................................
$2,300
GLENROSE SERVICING
Diane Towbell, capital, July 1...
Net income......................
Total ..................................
Diane Towbell, capital, July 31.
2,300
$22,700
$
-02,300
$25,000
2,000
$23,000
GLENROSE SERVICING
Balance Sheet
July 31, 2011
Assets Liabilities
Cash..........................$12,500
Total assets...............$23,800
800
Owners Equity
.............
23,000

101
102
FFS 2-1 (concluded)

Analysis component:
1. The increase in assets of $800 from June 30, 2011 to July
31, 2011 was financed by a $500 increase in liabilities
and a $300 increase in equity. The $300 increase in
equity resulted from a net income of $2,300 less
withdrawals of $2,000.
2. a. The income statement reports a companys financial
performance. A companys financial performance is how
a company performs or operates on a day-by-day basis:
the generation of revenues and incurring of expenses
that help create the revenues.
b. The balance sheet reports a companys financial
position at a specific point in
time. Financial position describes what assets,
liabilities, and equity a company has on a given date.
For example, Glenrose Servicings cash balance on July
31, 2011 is $12,500 this describes how much cash
Glenrose had on July 31.
3. Glenroses July 31, 2011 income statement reports a net income
of $2,300 which is reported on the July statement of owners
equity as one of the activities that caused equity to change
during the month. The ending capital balance reported on the
July statement of owners equity is reported on the July balance
sheet as the equity position on July 31, 2011.
FFS 2-2
Part A
1. WestJets assets are reported at cost in accordance with
the Cost Principle.
2. WestJet rounds to thousands of Canadian dollars on its
financial statements.
3. Assets = Liabilities + Equity; $2,213,092,000 =
$1,542,939,000 + $670,153.
4. No, the personal assets belonging to the owners of
WestJet are not included on WestJets financial
statements in accordance with the Business Entity
Principle.
102
103
5. (variety of answers possible, for example, the accounts

receivable manager would want to know if receivables
are being collected efficiently)
Part B
6. a. Total assets = $83,365,000;
b. Total net assets = $83,365,000 - $28,428,000 =
$54,937,000;
c. Assets = Liabilities + Equity; $83,365,000 =
$28,428,000 + $54,937,000.
7. Data is provided on a comparative basis so decision
makers can see the change from the previous year(s).
8. (variety of answers possible, for example, a potential
creditor would be interested in knowing if Danier will
have sufficient assets to cover any credit they grant)

103
104
CT 2-1
Note to instructor: Student responses will vary therefore the
answer here is only suggested and not inclusive of all
possibilities; it is presented in point form for brevity.
Goal(s)*:
Correctly state sales reports*
Problem(s):
Misclassification of items under GAAP
Assumption(s)/Principle(s):
The report should be prepared in accordance with GAAP to
protect users of the information so that users know on what
basis amounts have been recorded/reported.
Facts:
as shown in the September sales report prepared by the sales
person
Conclusion(s)/Consequence(s):
August 28 sale should be in August and not in September;
consequence of current reporting is that August revenue, net income,
and equity was understated and September revenue, net income,
and equity are overstated
September 10 purchase of desk is to be recorded as an asset and
not expensed; consequence of current reporting is that September
expenses will be overstated causing net income, assets, and equity
to be understated.
September 230 lunch costs should have been expensed;
104
105
consequence of current reporting is that statements wont balance (it

appears there are two credit entries with no debit) and that expenses
are understated with net income and equity overstated.
October 5 appears to be recorded correctly.
*This should be the goal since it is assumed that the owner(s) of the
business want accurate reports. However, the salesperson might
want to overstate the sales to make himself/herself look good; the
marketing manager might want to overstate sales for the same
reason. The goal is highly dependent on perspective.
Chapter 2 Financial Statements

and
Accounting Transactions
QUESTIONS
EXERCISES
e) $80,000 $65,000 = $15,000 net income
f) $92,000 $149,000 = $57,000 net loss
g) $10,000 + 0 0 + x = $86,000
x = $86,000 $10,000
x = $76,000 net income
h) $25,000 + $40,000 0 + x = $52,000

x = 52,000 25,000 40,000
x = $13,000 or a $13,000 Net loss

105
106
(a)
Answers
Proofs:
Owners equity,
January 1..........................
(b)
(c)
(d)
(e)
$) $36,00 $12,00 $21,50 $92,00

(24,750
0
0
0
0
$
0
$
0
$
0
$ $92,00
0
0
Owners investments
the year............................
60,000 36,000 31,500 37,000 150,00

0
15,75
0
40,50
0
(4,50) 21,500
0
(8,000)
Owners withdrawals
during the year ........ (24,750) (27,00) (15,00) (15,75) (63,00)
0
0
0
0
Owners equity,
$51,000 $49,50 $12,00 $42,75 $171,0
December 31....................
0
0
0
00

106
107

THE DOBBS GROUP
Income Statement
Revenues:
Operating expenses:
Rent expense........................
2,550
1,680
660
Net income................................
$18,000
10,890
$ 7,110

THE DOBBS GROUP
Net income......................
7,110
Total ..................................
$
0
84,000
91,110
$91,110
3,360
$87,750
Analysis component:

$7,110).
$87,750.

107
108

THE DOBBS GROUP
Balance Sheet
November 30, 2011
Assets Liabilities
Cash..........................$12,000
Automobiles............... 36,000
Total assets...............$95,250

Owners Equity
Analysis component:

of The Dobbs Group.
Income Statement
Revenues:
Total revenues....................
Operating expenses:
1,540
580
Net loss.....................................

$4,200
300
$ 4,500
4,620
$
120
108
109

Total ..................................
Net loss.........................
120
$ 7,400
1,200
$ 8,600
1,120
$ 7,480
Analysis component:
$80.
Balance Sheet
July 31, 2011
Assets Liabilities
Cash..........................$ 1,600
1,400
Supplies.....................
600
Furniture................... 1,800
...............
7,480
Owners Equity

109
110
Total assets........................
2,200
$8,880
$8,880
Analysis component:

110
111
Description

imagination.
a.
Assets Liabilities=
Owners
Equity
$60,000
=
........................$90,000
End of the year.............$240,000$92,000 = 148,000
Net income..................................................... $58,000

Net income....................................$100,000
42,000
$90,000 + x - $42,000 = $148,000; x = $100,000
Net loss......................................... $ 7,000
$90,000 + $65,000 + x = $148,000; x = ($7,000) where the
111
112

Net income.................................... $50,000
42,000
$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000
a.
$20,000 + $5,000 = $25,000 Assets at August 1, 2011.
$24,000
b.
$16,000
Assets
Cash
a)
Total
s
Liabilities +
Owners
Equity
Accounts
Receivab
Office
Accounts
Noel Bridges,
+
le
Capital
+
$2,500
+ $2,500
2,500
2,500

112
113
b)
Total
s
c)
Total
s
2,500
+
+ $200
+ $200
200
200
600
2,500
+
600
3,100
200
200
3,100
3,100
200
200
3,100
d)*
Total
s
e)
Total
s
1,500
1,600
f)
Total
s
1,500
200
200
+
$1,250
$1,600
$1,250
$3,050
1,600
+ 1,250
$200
$200
$2,850
$3,050

required.

113
114

Assets
Cash
Liabilitie +
s
Owners
Equity
Accounts
Parts
Receivabl
Supplie
Equipme
Accounts
+
e
+
s
+
nt
= Payable +
Janine
Commry,
Capital
a)
+ $7,000
+ $ 7,000
b)
- 2,500
- 2,500
Totals
$4,500
$ 4,500
c)
Totals
$4,500
d)
Totals
e)
Totals
+ $1,200
+ $1,200
$1,200
$1,200
+ $3,400
$4,500
$3,400
+ $ 3,400
$1,200
$ 950
$3,550
$ 4,500
$1,200
$7,900
$1,200
$7,900
$1,200
$ 7,900
+ $950
$3,400
$1,200
$950
f)*
Totals
g)
Totals
h)
Totals
i)
Totals
$3,550
$3,400
$1,200
$950
$1,200
$2,350
$1,200
$3,400
$1,200
$950
+ $1,400
$3,750
+ $ 1,400
$3,400
$1,200
$950
$2,700
$1,050
$7,900
$9,300
$ 2,700
$3,400
$1,200
$6,600
$950
$6,600
$6,600

required.

114
115

b.
c.
d.
e.
f.
g.


115
116

i) The business purchased land paying $3,000.
j) $400 of office supplies were purchased on credit (or on
account).
k) Paid $700 for the purchase of office supplies
l) $1,050 of revenue on account (or on credit) was earned.
m)
Collected $1,000 cash for revenue performed.
n) Paid $400 to a creditor.
o) Collected $1,050 from a credit customer.
p) The owner invested $5,000 of land.
Explanation
Payable
Capital of Change
a. $25,000
$5,000
b. 1,300
Expense
$23,700
$5,000
c.
$23,700
d.
+6,000
+6,000
$11,000
$6,000
$11,000
$6,000
+$1,000
$1,000
f. 4,000
$20,200
h. +
250
Rent
$28,700
500
$11,000
Revenue
$29,200
+ 1,000
$6,000
$30,200
$6,000
$30,200
Revenue
+ 4,000
$1,000
$15,000
g. 1,200
Expense
$19,000
$1,300
$24,200
$24,200
Investment
$28,700
+ 500
e.
$30,000
1,200
$1,000
$15,000
$6,000
Wages
$29,000
250

116
117
$19,250
i.
$750
$15,000
$6,000
6,000
$13,250
j.
$29,000
6,000
$750
$15,000
$29,000
250
$13,000
$28,750
$750
$28,750
Revenue
($500 + $1,000)
$15,000
250
Withdrawal
$28,750
Expenses
=
Net loss
($1,300 + $1,200) =

$1,000
117
118

asset) for cash.
cash.
on credit.
receivable.
Assets
Cash
Liabiliti +
es

Receivab s
nt
s
Deweer
n
le
Payable
d,
Capital
a)
b)
Total
s
d)
Owner
+$2,500 Investment
+ $2,500
+ $4,000
$4,000
+$4,000 Revenue
$
c)
Total
s
Owners Equity
$2,500
+ $150
$4,000
$150
$6,500
+ $150
$2,500
$150
$ 450

$6,500
$ 450 Sal.
Expense
118
119
Total
s
$3,550
$150
$2,500
$150
$6,050
$3,550
$150
$2,500
$150
$6,050
e)*
Total
s
f)
Total
s
$
1,400
$2,150
g)
Total
s
$ 1,400 Rent
Expense
$
$150
$2,500
$150
+ $2,000
$2,150
$2,000
$6,800
$4,650
+$2,000 Revenue
$150
$2,500
$150
$6,650
$6,800

required.

119
120

Income Statement
Revenues:
$6,000
Operating expenses:
Salaries expense
Rent expense
450
1,40
0
1,85
0
Net income
$4,1
50


Add:
Investment by owner
Net income
$2,500
4,15
0

6,65
0
120
121
$6,6
50

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$2,1
50
Accounts payable
$
150
Accounts 2,00
receivable
0
Supplies
Equipment
150
2,50
0
Owners Equity
Total assets
$6,8
00
6,65
0

equity
00

121
122

Analysis component:
d. Supplies of $150 were financed by accounts payable, a liability.
e. Equipment of $2,500 was financed by owner investment, an
equity transaction.
f. Cash of $2,150 and Accounts receivable of $2,000 were
Assets
Cash
a)
+
$500
+$400
$500
Owner
+$15,500 Investment
+$15,000
c)
Total
s
Owners Equity

Explanatio
Receivab s
nt
s
Jong,
n
le
Payable
Capital
b)
Total
s
Liabiliti +
es
$400
+$400
$15,000
+$600
$400
$15,500
+$600
$500
$1,000
$15,000
$1,000
$15,500
$500
$1,000
$15,000
$1,000
$15,500
d)*
Total
s
e)
Total
s
+$550
$500
f)
Total
s
$550
+$550 Revenue
$1,000
$15,000
$1,000
+$600
$500
$1,150
$16,050
+$600 Revenue
$1,000
$15,000
$1,000

$16,650
122
123
g)
-$200
Total
s
$300
h)
-$250
Total
s
$50
-$200
$1,150
$1,000
$15,000
$800
$16,650
-$250 Adv.
Expense
$1,150
$1,000
$17,200
$15,000
$800
$16,400
$17,200

required.

123
124

Petes Yard Care
Income Statement
Revenues:
Yard care revenue
$1,150
Operating expenses:
Advertising expense
250
Net income
$
900
Petes Yard Care

Add:
Investment by owner
$15,500
Net income
900
16,40
0
$16,4
00
Petes Yard Care

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$
50
Accounts payable

124
125
800
Accounts 1,150
receivable
Supplies
Equipment
1,000
15,000
Owners Equity
Pete Jong, capital
16,40
0

Total assets
$17,20
0
owners equity
$17,2
00
Analysis component:

125
126

Assets
Cash
Bal.
$1,200
+$1,000
-$1,000
Total
s
$5,000
$200
b)
-$2,000
Total
s
$3,000
c)
+$700
Total
s
$3,700
d)
-$500
Total
s
$3,200
e)
-$1,200
Total
s
$2,000
f)
-$600
Total
s
$1,400
g)
Total
s
Owners Equity

Otto
Receivab s
nt
s
Ingles,
le
Payable
Capital
$4,000
a)
Liabiliti +
es
$900
$7,500
$4,000
$9,600
$900
$7,500
$4,000
$9,600
-$2,000
$200
$900
$7,500
$2,000
$9,600
+$700 Revenue
$200
$900
$7,500
$2,000
$10,300
-$500 Wage
Exp.
$200
$900
$7,500
$2,000
$9,800
-$1,200 Rent Exp.
$200
$900
$7,500
$2,000
$8,600
-$600 Utilities
Exp.
$200
$900
$7,500
$2,000
+$400
$1,400
Explanati
on
$600
$8,000
+$400 Revenue
$900
$7,500
$2,000
$8,400
h)*
126
127
Total
s
$1,400
$600
$900
$10,400
$7,500
$2,000
$8,400
$10,400

required.

127
128

Income Statement
Revenues:
Wrecking revenue
$1,100
Operating expenses:
Rent expense
$ 1,200
Wages expense
500
Utilities expense
600

Net loss
2,30
0
$1,2
00

$ 9,600
Less: Net loss
1,200
$
8,400

Balance Sheet
July 31, 2011
128
129
Assets
Cash
Accounts
receivable
Supplies
Equipment
Liabilities
$1,400
Accounts payable
$
2,000
600
900
7,500
Owners Equity
8,400

Total assets
$10,40
0
owners equity
$10,4
00
Analysis component:
$8,400 or 80.77% (calculated as $8,400/$10,400 100) of the assets are
financed by Otto Ingles, the owner. $2,000 or 19.23% (calculated as
$2,000/$10,400 100) of the assets are financed by debt.
Chapter 3
Analyzing and Recording

Transactions
EXERCISES

129
130
Cash
Accounts Payable
(a)
25,500
750 (b)
(d)
3,000
14,10 (e)
0
(h)
(e)
14,100 (c)
0 Balance
2,250 1,05 (g)

0
Ella Tims, Capital
2,000 (i)
Balance
14,100
12,850
25,500 (a)
25,500 Balance
Accounts Receivable
(f)
5,400
Balance
3,150
Ella Tims, Withdrawals
2,250 (h)
(i)
2,000
Balance
2,000
Office Supplies
(b)
750
Balance
750
Fees Earned
3,000 (d)
5,400 (f)
Office Equipment
(c)
14,100
Balance
14,100
8,400 Balance
Rent Expense
(g)
1,050
Balance
1,050

130
131

Neil Simon, Capital
Cash
Jan.
31
Feb.
700
4,000
Feb.
14
2,800
60
23
2,400
1,000
25
800
26
800 Jan. 31
800 Bal.
2
20
Bal.
40
Neil Simon, Withdrawals
Accounts Receivable
Jan.
31
Feb.
1,200
2,40
0
Feb.
20
Jan.
31
Feb.
25
Bal.
-01,000
1,000
15,000
12
18
Bal.
1,90
0
Service Revenue
15,700
2,600 Jan. 31
2,800 Feb. 2
Prepaid Insurance

15,000
12
131
132
Jan.
31
Feb.
-0-
1,900
4,000
18
22,300 Bal.
14
Bal.
4,000
Wages Expense
Computer Equipment
Jan.
31
Feb.
480
7,600
Jan. 31
1,080
Feb. 26
800
Bal.
1,880
10
Bal.
8,080
Accounts Payable
Feb.
60
60 Jan. 31
NOTE:
There
is
no
entry
to be recorded
23
for February 21.
-0- Bal.
Notes Payable
-0- Jan. 31
7,600 Feb.
10
7,600 Bal.
Analysis component:
Revenue recognition requires that when a transaction has occurred, it must be
recorded whether cash has been received or not. A transaction has occurred
when there has been an economic exchange when something has been given
up or received. On February 12, services were performed and, although cash will
not be received until a future date, a revenue must be recorded because an
economic exchange has occurred.

132
133

Nels Sigurdsen, Withdrawals
Cash
Mar.
31
Apr.
2
19
Bal.
1,800
400 Apr.
780
300
10
15
2,000
1,000
29
Mar.
31
Apr.
29
Bal.
500
1,000
1,500
2,880
Repair Revenue
14,000 Mar.
Accounts Receivable
Mar.
31
Apr.
18
4,800
Bal.
4,000
31
2,000 Apr.
780 Apr. 2
19
1,200
1,200
18
15,980 Bal.
Repair Supplies
Mar.
31
Apr.
9
1,400
Bal.
2,290
Rent Expense
Mar.
31
Apr.
25
Bal.
890
950
250
1,200
Equipment
Mar.
31
Apr.
15
Bal.
7,400
300
7,700
Accounts Payable
Apr.
10
400
500 Mar.
31

133
134
890 Apr.
250
9
25
1,240 Bal.
Nels Sigurdsen, Capital
2,350 Mar.
31
2,350 Bal.
NOTE: There is no entry to be recorded for April 5.

134
135

2.
GENERAL JOURNAL
Account Titles and
PR
Explanations
Dat
e
201
1
Jul
Cash..............................
y
1
Sue Ware, Capital.....
To record investment
by owner.
Debit
101
5,000
301
1 Equipment.....................
0
Accounts Payable.....
Purchased equipment
on credit.
150
1 Cash..............................
2
Revenue...................
Performed services for
cash.
101
1 Expenses.......................
4
Cash.........................
Paid expenses.
501
1 Accounts Receivable .....

5
Revenue...................
Completed services on
account.
106
3 Sue Ware, Withdrawals. .

1
302
Page 1
Credit
5,000
2,500
201
2,500
10,000
401
10,000
3,500
101
3,500
1,500
401

1,500
250
135
136
Cash.........................
Owner withdrew cash.
101

250
136
137
Exercise 3-4 (continued)

*Note: The student could use T-accounts or balance column format
accounts as their general ledger. Both are shown in this
solution.
1 and 3.
Cash
July 1
12
Balance
101
5,000
10,000
3,500 July 14
250
31
11,250
Accts. Receivable
July
15
106
1,500
Equipment
July 10
150
2,500
Accounts Payable
201
2,500
Sue Ware,
Capital
5,000
July 10
301
July 1

137
138
Sue Ware,
Withdrawals
July 31
302
250
Revenue
401
10,000
1,500
11,500
July 12
15
Balance
Expenses
501
July 14
3,500

138
139

1 and 3.
Account No. 101
Cash
Date
Explanation
PR
Debit
Credit
Balance
2011
July
G1
5,000
5,000
12
G1
10,000
15,000
14
G1
3,500
11,500
31
G1
250
11,250
Account No. 106
Accounts Receivable
Date
Explanation
PR
Debit
Credit
Balance
2011
July 15
G1
1,500
Account No. 150
Equipment
Date
Explanation
1,500
PR
Debit
Credit
Balance
2011
July 10
G1
2,500
Account No. 201
Accounts Payable
Date
Explanation
2,500
PR
Debit
Credit
Balance
2011
July 10
G1
2,500
Account No. 301
Sue Ware, Capital
Date
Explanation
2,500
PR
Debit

Credit
Balance
139
140
2011
July
G1
5,000
Account No. 302
Sue Ware, Withdrawals
Date
Explanation
5,000
PR
Debit
Credit
Balance
2011
July 31
G1
250
Account No. 401
Revenue
Date
Explanation
250
PR
Debit
Credit
Balance
2011
July 12
G1
10,000
10,000
15
G1
1,500
11,500
Account No. 501
Expenses
Date
Explanation
PR
Debit
Credit
Balance
2011
July 14
G1
3,500
3,500

4.
DelaWare
Trial Balance
July 31, 2011
Acct
. No.
Account Title
101Cash.........................
106Accounts receivable .
150Equipment................
Credi
Debit
t
$11,
250
1,50
0
2,50
0

140
141
201Accounts payable......
$
2,50
0
5,00
0
301Sue Ware, capital......

302Sue Ware, withdrawals
401Revenue...................
501Expenses..................
Totals...........................
5.
250
11,5
00
3,
500
$19,
000
$19,
000
DelaWare
Income Statement
Revenue................................
$11,
500
3,
500
$8,0
00
Expenses...............................
Net income............................
DelaWare
Sue Ware, capital, July 1........
Add: ....Investments by owner
Net income......................
Total...................................
$5,0
00
8,0
00
$
0
13,
000
13,0
00
Less: Withdrawals by owner...

250
141
142
Sue Ware, capital, July 31.......
$12,
750

142
143

5. (concluded)
DelaWare
Balance Sheet
July 31, 2011
Assets
Liabilities
Cash..................................
$11,25
0
Accounts receivable..........
1,500
Equipment.........................
2,500
Accounts payable.....................
$
2,500
Owners Equity
Sue Ware, capital.....................
12,75
0

Total assets.......................
$15,25
0
owners equity......................
$15,25
0
Analysis component:
Accounts receivable result from credit sales to customers
(debit accounts receivable and credit a revenue). Sales, or
revenue, is part of equity. As revenues on account are
recorded, assets on the one side of the accounting
equation increase and equity on the opposite side of the
accounting equation also increases. Therefore, accounts
receivable are financed by, or created by, an equity
transaction.
Note: Students could choose any account number within the specified range.
Account
Number
Account Name
110
Cash

143
144
115
Accounts Receivable
160
Office Equipment
210
Accounts Payable
215
Unearned Revenue
310
Wes Bosse, Capital
320
Wes Bosse, Withdrawals
410
Consulting Revenues
510
Salaries Expense
520
Rent Expense
530
Utilities Expense

144

145
Exercise 3-6 (30 Minutes)

2.
Cash
Bal
Feb
1
10
Bal
11
Accounts
0
Receivable
11,5 2,00 Feb Bal 6,00
00
0
5
0
8,50 500
17
0
2,50 10,0
28
0
00
10,0
00
Unearned
21
Revenue
5
500 Bal
Wes Bosse,
Capital
9,50
0
11
5
31
0
Bal
2,50 Feb
0 10
3,00 Bal
0
Salaries
Expense
Bal
10,0
00
Feb
10,0
28
00
Bal
20,0
00
51
0
Rent
Expense
Bal 7,50
0
52
0
Office Equipment 16
0
Bal
12,5
00
Wes Bosse,
Withdrawals
Bal
2,00
0
Feb
500
17
Bal
2,50
0
32
0
Utilities
Expense
Bal
1,00
0
53
0
Accounts
21
Payable
0
Feb 2,00 3,00 Bal
5
0
0
1,00 Bal
0
Consulting
Revenues
37,5
00
8,50
0
46,0
00
41
0
Bal
Feb
1
Bal
91
146
147

1.
Dat
e
201
1
Fe
b.
1
General Journal
Account Titles and
PR
Explanations
Cash.............................
Consulting
Revenues.....................
Performed work for
cash.
Accounts Payable..........
Cash.......................
Paid account.
1
0
Cash.............................
Unearned Revenue. .
Received cash in
advance.
1
2
No entry.
1
7
Wes Bosse,
Withdrawals.................
Cash.......................
2
8
Salaries Expense...........
Cash.......................
Paid salaries.
Debit
10
1
41
0
8,500
21
0
10
1
2,000
10
1
21
5
2,500
32
0
10
1
500
51
0
10
1
10,000
Page G1
Credit
8,500
2,000
2,500
500
10,000
3.

147
148
Bosse Advisors
Trial Balance
February 28, 2011
Acct.
No.
Account Title
Debit
Credit
101 Cash.....................................
$
10,000
115 Accounts receivable .............
6,000
160 Office equipment.................. 12,500
210 Accounts payable.................
$
1,000
215 Unearned revenue................
3,000
310 Wes Bosse, capital................
9,500
320 Wes Bosse, withdrawals........
2,500
410 Consulting revenues.............
46,00
0
510 Salaries expense.................. 20,000
520 Rent expense.......................
7,500
530 Utilities expense...................
1,00
0
Totals................................... $59,50 $59,5
0
00

148
149

4.
Assets
Cash..................
Accounts
receivable..............
Office
equipment.............
Bosse Advisers
Balance Sheet
February 28, 2011
Liabilities
$10,00
0
6,000
Unearned revenue...
12,50
0
Owners Equity
Wes Bosse, capital. .
Total assets........
$28,50
0

owners equity.....
$
1,000
3,00
0
$
4,000
24,500
$28,50
0
Capital = 9,500
Opening Balance
+ 46,000 Revenues
28,500 Salaries, Rent and Utilities expenses
2,500 Withdrawals
= 24,500 Closing Balance
Analysis component:
Unearned revenue occurs when cash is received from a customer in
advance of the work being done. The collection is not recorded as a
revenue because it has not been earned until the work is done.
Unearned revenue is therefore a liability because the business owes
the customer a service (or work). For example, WestJet receives
cash from customers in advance of the customer actually flying.
These cash collections are recorded as unearned revenue, a liability,
because the cash doesnt belong to WestJet until they have earned it
which occurs when the customer takes their flight.

149
150

a.
Cash.......................................................................
7,000
Equipment.............................................................
5,600
Automobiles...........................................................
11,000
Jerry Steiner, Capital....................

23,600
Owner invested cash, an automobile and equipment in
the business.
b. Prepaid Insurance.............................
Cash................................................................
3,600
3,600
Purchased insurance coverage in advance.
c. Office Supplies..................................
600
Cash................................................................
600
Purchased supplies with cash.
d. Office Supplies..................................
200
Equipment.............................................................
9,400
Accounts Payable............................................
9,600
Purchased supplies and equipment on credit.
e. Cash.................................................
Delivery Services Revenue..............................
2,500
2,500
Received cash from customer.
f. Accounts Payable..............................
Cash................................................................
2,400
2,400
Made payment on payables.
g. Gas and Oil Expense..........................

Cash................................................................
700
700
Paid for gas and oil.

150
151

2011
April Cash..................................................................
5
1,500
Surgical Revenues....................
1,500
Performed surgery and collected cash.
8 Supplies........................................
3,000
Accounts Payable........................................
3,000
Purchased surgical supplies on credit.
15 Salaries Expense...............................................
57,000
Cash............................................................
57,000
Paid salaries.
20 Accounts Payable..............................................
3,000
Cash............................................................
3,000
Paid for the credit purchase of April 8.
21 No entry.
22 Accounts Receivable.........................................
9,000
Surgical Revenues......................................
9,000
Performed six surgeries on credit;

$1,500 x 6 = $9,000
29 Cash..................................................................
Accounts Receivable.................................
3,000
3,000
151
152
Collection from credit customers of April 22.
30 Utilities Expense................................................
Cash............................................................
1,800
1,800
Paid the April utilities.

152
153

b. Accounts Receivable...........................
Services Revenue..........................
Provided services on credit.
2,700
c. Cash..................................................
Provided services for cash.
3,150
2,700
3,150
Revenues are inflows of assets (or decreases in liabilities)

received in exchange for goods or services provided to
customers. The other transactions did not create revenues
for the following reasons:
a. This transaction brought in cash, but it was an investment
in the company.
d. This transaction brought in cash, but it also 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 not generated.
f. This transaction brought cash into the company and
increased assets, but it also increased a liability by the
same amount.
b. Salaries Expense...............................
Cash............................................
Paid the salary of the receptionist.
1,125
d. Utilities Expense...............................
Cash............................................
Paid the utilities for the office.
930
1,125
930
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. The transactions labelled a, c, and e
were not expenses for the following reasons:
a. This transaction decreased assets in settlement of a
previously existing liability. Thus, the using up of assets
did not reduce owners equity.
153
154
c. This transaction was the purchase of an asset. The form of

the companys assets changed, but total assets did not
change, and the equity did not decrease.
e. This transaction was a distribution of cash to the owner.
Even though owners equity decreased, the decrease did
not occur in the process of providing goods or services to
customers.

154
155

Parts a and b:
Account No. 101
Cash
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
850
2011
Jan.
G1
3,500
2
0
G1
3
1
G1
3
1
G1
3,000
4,350
3
1
G1
750
3,600
2,000
5,000
Explanation
2,350
7,350
Account No. 106
Accounts Receivable
Date
4,350
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
300
2011
Jan.
1
2
G1
3
1
G1
9,000

9,300
5,000
4,300
155
156
Account No. 167
Equipment
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,500
2011
Jan.
2
0
G1
12,000
Account No. 201
Accounts Payable
Date
Explanation
13,500
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
325
2011
Jan.
2
0
G1
10,000
Account No. 301
Jay Walker, Capital
Date
Explanation
10,325
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
2,325
2011
Jan.
G1

3,500
5,825
156
157
Exercise 3-11 (Parts a and b continued)

Account No. 302
Jay Walker, Withdrawals
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
300
2011
Jan.
3
1
G1
750
Fees Earned
Date
Explanation
1,050
Account No. 401

PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,800
2011
Jan.
1
2
G1
9,000
Salaries Expense
Date
Explanation
10,800
Account No. 622

PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,500
2011
Jan.
3
1
G1
3,000

4,500
157
158

Note: After posting the journal entries, the PR column in the General Journal
would appear as follows:
General Journal
Date
Account Titles and Explanations
Page 1
Debit
Credit
2011
Jan. 1 Cash..................................................................
10
1
Jay Walker, Capital......................................
30
1
3,500
3,500
Additional owner investment.

10
6
Fees Earned................................................
40
1
9,000
9,000
Performed work for a customer on account.

20 Equipment.........................................................
16
7
12,000
Cash............................................................
10
1
2,000
20
1
10,000
Purchased equipment paying cash and the

balance on credit.
31 Cash..................................................................
10
1
Accounts Receivable...................................
10
6
5,000
5,000
Collected cash from credit customer.

62

3,000
158
159
2
Cash............................................................
10
1
3,000
Paid month end salaries.

31 Jay Walker, Withdrawals....................................
30
2
Cash............................................................
10
1
750
750
Jay Walker withdrew cash for personal use.

Analysis component:
All of the details regarding a transaction, such as serial
numbers or invoice numbers, form part of the journal entry
recorded in the journal. The general ledger does not
accommodate these kind of very necessary details.
Therefore, we need to journalize to ensure important
details are readily available.
The general ledger summarizes by account all of the
transactions recorded in the journal. For example, without
the ledger, we would not be able to determine the balance
in cash without going through the journal and
adding/subtracting all of the individual transactions. The
ledger allows us to have account balance information.
In summary, although it appears that journalizing and posting are recording the
same information twice, the journal and ledger each serve different and
important functions in the accounting system.

General Journal

Page
G1
159
160
Date
2011
Aug.
Account Titles and

Explanations
PR
Debit
Cash.........................................
10
1
15,000
Photography Equipment....................
16
7
17,000
Tara Harper, Capital......
30
1
Credit
32,000
Owner invested in the business.

1
Prepaid Rent......................................
13
1
Cash............................................
10
1
6,500
6,500
Rented studio space.

5
Office Supplies...................................
12
4
Cash............................................
10
1
1,800
1,800
Purchased office supplies.

20
Cash..................................................
10
1
Photography Fees Earned...........
40
1
9,200
9,200
Collected photography fees.

31
Utilities Expense.......................
69
0
Cash...................................
10
1
1,100
1,100
Paid for August utilities.
Note: The accountnumbersin the PR columnabovewouldbe includedonly duringthe postingof thesejournal

160
161
entriesinto the ledgeraccountsin Exercise3-13.

161
162

Cash
Date
Explanation
Account No. 101

PR
Debit
Credit
Balance
G1
15,000
G1
6,500
8,500
G1
1,800
6,700
2
0
G1
3
1
G1
2011
Aug.
9,200
Explanation
15,900
1,100
14,800
Account No. 124
Office Supplies
Date
15,000
PR
Debit
Credit
Balance
2011
Aug.
G1
1,800
Account No. 131
Prepaid Rent
Date
Explanation
1,800
PR
Debit
Credit
Balance
2011
Aug.
G1
6,500
Account No. 167
Photography Equipment
Date
Explanation
6,500
PR
Debit
G1
17,000
Credit
Balance
2011
Aug.

17,000
162
163
Account No. 301
Tara Harper, Capital
Date
Explanation
PR
Debit
Credit
Balance
2011
Aug.
G1
32,000
Account No. 401
Photography Fees Earned
Date
Explanation
32,000
PR
Debit
Credit
Balance
2011
Aug.
2
0
G1
9,200
Utilities Expense
Date
Explanation
9,200
Account No. 690

PR
Debit
Credit
Balance
2011
Aug.
3
1
G1
1,100

1,100
163
164
THE PIXEL SHOP

Trial Balance
August 31, 2011
Acct
No.
Account Title
Debit Credit
101 Cash.................................. $ 14,800

124 Office supplies...................
1,800
131 Prepaid rent.......................
6,500
167 Photography equipment....
17,000
301 Tara Harper, capital...........
$32,000
401 Photography fees earned. .
9,200
690 Utilities expense................
1,100
Totals................................. $41,200
$41,200
Analysis component:
The trial balance is an internal working paper used to verify that

debits and credits in the general ledger are equal and to review
account balances. The trial balance format does not readily
communicate information such as financial performance and financial
position, information that is desired by external decision makers.
Financial statements are used for external reporting because the
formats of these communicate information desired by external users.
For example, the income statement reports financial performance
while the balance sheet reports financial position.

164
165

Cash
Aug.
1
20
Bal
Aug.
1
101
15,00 6,50 Aug. 1

0
0
9,200 1,80
5
0
1,10
31
0
14,80
0
Photography 16
Equipment 7
17,0
00
Photography Fees 40
Earned 1
9,2 Aug.
00 20
Office
Supplies
Aug. 1,80
5
0
124
Prepaid
Rent
Aug. 6,50
1
0
13
1
Tara Harper, Capital 30

1
32,0 Aug.
00 1
Aug.
31
Utilities
Expense
1,10
0
690
THE PIXEL SHOP

Trial Balance
August 31, 2011
Acct.
No.
Account Title
Debit Credit
101
Cash...............................................
$ 14,800
124
Office supplies................................
1,800
131
Prepaid rent...................................
6,500
167
Photography equipment.................
17,000
301
Tara Harper, capital.......................

..........................................$32,000
401
Photography fees earned...............

..............................................9,200
690
Utilities expense.............................
1,100

165
166
Totals.............................................
$41,200
$41,200
Analysis component:

Hogans Consulting
Income Statement
Operating expenses:
Rent expense....................
$46,
000
$37,
000
14,0
00

Net loss.................................
51,0
00
$
5,00
0
Hogans Consulting
Lisa Hogan, capital, January 1
$
0

166
167
50,0
00
$50,
000
Total...................................
Net loss........................
$2,0
00
5,00
0
Lisa Hogan, capital, December

31.........................................
7,00
0
$43,
000
Hogans Consulting
Balance Sheet
December 31, 2011
Assets
Liabilities
Cash..................................
$12,00
0
Cleaning supplies..............
8,300
Notes payable..........................
53,500
Prepaid rent.......................
5,000
Total liabilities..........................
$54,30
0
Equipment.........................
72,00
0
Owners Equity
Lisa Hogan, capital...................
800
43,000

Total assets.......................
$97,30
0
owners equity......................
$97,30
0
Analysis component:
Losses cause equity to decrease. If equity decreases, either assets have to
decrease and/or liabilities must increase to keep the balance sheet in
balance. Therefore, if Hogans Consulting continues to experience losses,
there are two short-term alternatives available to prevent a decrease in
assets. First, the business could borrow which would increase liabilities and
temporarily increase assets until payments had to be made. Longer term,
the cash to make the payments cannot be borrowed. Second, Lisa Hogan,
the owner, could invest additional assets into the business which would
increase equity and assets. However, for the long-term, the owner does not
want to support the business through continual investments; the business
167
168

JenCo
Income Statement
Revenues:
Service revenue...........................................................
$1,900
Operating expenses:
Salaries expense..........................................................
$
800
Interest expense..........................................................
10
Total operating expenses........................................
810
Net income........................................................................
$1,090
JenCo
Marie Jensen, capital, March 1..........................................
Add: Investment by owner...............................................
$2,05
0
Net income..............................................................
1,09
0
$3,140
Total.............................................................................
$3,140
Less: Withdrawal by owner..............................................
1,500
Marie Jensen, capital, March 31........................................
$1,640
JenCo
Balance Sheet
March 31, 2011
Assets
Liabilities

168
169
Cash................................
$1,00
0
Accounts payable..........
$
260
Accounts receivable.......
950
Unearned service revenues.......
250
Prepaid insurance...........
300
Notes payable............................
80
0
Equipment......................
70
0
Total liabilities......................
$1,31
0
Owners Equity
Total assets....................
$2,95
0
Marie Jensen, capital.................
1,64
0

equity........................................
$2,95
0

169
170

Bentley Marketing Services
Income Statement
Revenues:
Fees earned.........................................................
$170,0
00
Operating expenses:
Wages expense....................................................
$166,0
00
Office supplies expense.......................................
7,00
0
Total operating expenses.................................
173,0
00
Net loss.....................................................................
$
3,000

Dee Bentley, capital, March 1...................................
$112,00
0*
Add: Investment by owner.......................................
10,0
00
Total....................................................................
$122,0
00
Less: Withdrawal by owner......................................
$
18,000
Net loss..........................................................
3,000
Dee Bentley, capital, March 31.................................

21,00
0
$101,0
00
170
171

Balance Sheet
March 31, 2011
Liabilities
Assets
Cash...............
$
30,000
Accounts payable ...... $ 46,000
Accounts receivable
...............................
14,000
Notes payable ........................
146,00
0
Office supplies........
3,000
$
192,000
Building...................
80,000
Land........................
116,00
0
Machinery...............
50,0
00
Total assets............
$293,0
00
Owners Equity
Dee Bentley, capital..................
101,00
0

equity........................................
*$122,000 March 31/11 Balance - $10,000 invested in March =

$112,000 March 1/11 Balance

171
172
Description
(1)
Difference
between
Debit and
Credit
Columns
a. A $2,400 debit to Rent

Expense was posted as a
$1,590 debit.
$810
b. A $42,000 debit to
Machinery was posted as
a debit to Accounts
Payable.
$0
(2)
(3)
Colum
Identify
n with account(s)
the
incorrectly
Larger
stated
Total
(4)
Amount that
account(s) is
overstated or
understated
Credit
Rent
Expense
Rent Expense is
understated by
$810
Machinery
Machinery is
understated by
$42,000 and
Accounts
Payable is
understated by
$42,000
Accounts
Payable
c. A $4,950 credit to
Services Revenue was
posted as a $495 credit.
$4,455
Debit
Services
Revenue
Services
Revenue is
understated by
$4,455
d. A $1,440 debit to Store

Supplies was not posted at
all.
$1,440
Credit
Store
Supplies
Store Supplies is
understated by
$1,440
e. A $2,250 debit to Prepaid

Insurance was posted as a
debit to Insurance
Expense.
$0
Prepaid
Insurance
Prepaid
Insurance is
understated by
$2,250 and
Insurance
Expense is
overstated by
$2,250
Insurance
Expense
f. A $4,050 credit to Cash

was posted twice as two
credits to the Cash
account.
g. A $9,900 debit to the
owners withdrawals
account was debited to
the owners capital
$4,050
$0
Credit
Cash
Cash is
understated by
$4,050
Owners
Capital
Owners Capital
account is
understated by
$9,900

172
173
account.
Owners
Owners
Withdrawal Withdrawals is
s
understated by
$9,900

173
174

a. 1.
Dr = Cr
2. Accounts Receivable is understated (too low) by $3,500
and Revenue is understated by $3,500.
b. 1.
Dr = Cr
2. Accounts Payable is overstated (too high) by $600 and
Cash is overstated by $600.
c. 1. Dr Cr
2. Cash is overstated by $180.
d. 1. Dr Cr
2. Accounts Receivable is overstated.
e. 1. Dr = Cr
2. Accounts Payable is understated
Equipment is understated by $2,000.
by
$2,000
and

Case A:
1. Subtract total debits in the trial balance from total credits

5,010 4,290 = 720
2. Divide the difference by 9
720 9 = 80
3. The quotient equals the difference between the two transposed numbers.
The difference between the correct number and the incorrect
number is 80.
4. The number of digits in the quotient tells us the location of the
transposition.
Look for a difference of 8 between the second number from the right
and the third number from the right.
Through a process of elimination, the incorrect value is Accounts Payable of

$190. The correct value must be $910.
Proof: Recalculate the trial balance replacing $910 for the

incorrect $190 and the trial balance now balances at $5,010.
174
175

Case B:
34,400 28,100 = 6,300
2. Divide the difference by 9 to reveal a slide error
6,300 9 = 700
3. The quotient identifies a slide error and equals the correct value.
Through a process of elimination, the incorrect value is Withdrawals for $7,000.
The correct value must be $700.

incorrect $7,000 and the trial balance now balances at
$28,100.
Case C:
942 906 = 36
36 9 = 4
number is 4.
transposition.
Look for a difference of 4 between the first number from the right
and the second number from the right.
Through a process of elimination, the incorrect value is Cash for $59. The correct
value must be $95.

175
176
incorrect $59 and the trial balance now balances at $942.
Chapter 4
Adjusting Accounts for

Financial Statements
EXERCISES

1.
7.
2.
8.
3.
9.
4.
10.
5.
11.
6.
12.

176
177
a
)
201
1
Dec
.
31 Amortization Expense, Equipment.....
32,000
Accumulated Amortization,
Equipment.........................................
To record amortization expense for
the year.
32,000
b
)
31 Insurance Expense............................
c
)
31 Office Supplies Expense....................
d
)
31 Unearned Fee Revenue.....................
e
)
f)
31 Wages Expense.................................
Wages Payable............................
To record wages accrued but not
yet paid.
8,000
6 Wages Payable..................................
8,000
Wages Expense.................................
12,000
g
)
11,920
Prepaid Insurance........................
To record insurance coverage that
expired
during the year; $14,000 $2,080.
11,920
5,252
Office Supplies............................
To record office supplies
consumed during
the year; $600 + $5,360 $708.
5,252
20,000
Fee Revenue...............................
To record earned portion of fee
received in
advance; $30,000 2/3 = $20,000.
20,000
9,200
expired
during the year.
201
2
Jan.

9,200
8,000
177
178
Cash..........................................
To record the payment of wages.

20,000
178
179

201
1
a
)
Dec.
31 Unearned Revenue.........................
16,0
00
Revenue...........................................
16,000
To record earned revenue;

$18,500 - $2,500 = $16,000.
31 Amortization Expense, Building......
b
)
10,5
00
Accumulated Amortization, Building...
c
)
10,500
To record amortization expense.
31 Spare Parts Expense...............................
350
Spare Parts Inventory........................
350
To record the use of spare parts

inventory;
$450 - $100 = $350.
d
)
31 Accounts Receivable...............................
3,55
0
Revenue...........................................
3,550
To record accrued revenue.
e
)
31 Utilities Expense....................................
Utilities Payable (or Accounts
Payable)................................................

1,30
0
1,300
179
180
To record accrued utilities.
201
2
f)
Jan.
4 Cash......................................................
3,55
0
Accounts Receivable.......................
3,550
To record collection of accrued

revenues.
g
)
14 Utilities Payable (or Accounts Payable)....
1,30
0
Cash...............................................
1,300
To record payment of accrued

utilities.

201
1
a)
Sept
.
30 Unearned Revenue................................
12,0
00
Revenue..........................................
12,000
To record earned revenue.
b)
30 Amortization Expense, Furniture...................................

Accumulated Amortization, Furniture
150
150
To record amortization for one month;

7,200/4 yrs = 1,800/yr; 1,800/12
months = 150/month.

180
181
c)
Sep
t.
30 Office Supplies Expense.......................
5,00
0
Office Supplies...............................
5,000
To record the use of office supplies.
d)
30 Accounts Receivable............................
28,0
00
Revenue........................................
28,000
e)
30 Rent Expense......................................
7,00
0
Rent Payable (or Accounts Payable)
7,000
To record accrued rent.
f)
Oct.
3 Cash.................................................
28,0
00
Accounts Receivable..................
28,000

revenue.
g)
4 Rent Payable (or Accounts Payable)...
7,00
0
Cash.........................................
7,000
To record payment of accrued rent.

2011
a
)
Ma
r.
31 Unearned Rent................................................................

7,500
181
182
Rent Earned......................................
7,500
Earned five months rent previously

paid in advance;
$1,500 x 5 = $7,500.
b
)
31 Rent Receivable.....................................
2,700
Rent Earned......................................
2,700
Earned two months rent that has not

yet
been collected; $1,350 x 2 = $2,700.
c
)
Apr
.
22 Cash......................................................
4,050
Rent Receivable................................
2,700
Rent Earned......................................
1,350
Collected rent for February, March, and

April.

182
183

201
1
a)
Dec.
31 Accounts Receivable.........................................................
2,00
0
Fees Earned (or Revenue)...................
2,00
0
To record accrued fees earned.

b)
31 Rent Expense..........................................
8,00
0
Prepaid Rent......................................
8,00
0
To record expired rent.

c)
31 Amortization Expense, Machinery.............
400
Accumulated Amortization, Machinery.
40
0

d)
31 Unearned Fees........................................
2,80
0
2,80
0
To record fees earned.

e)
31 Salaries Expense.....................................
Salaries Payable.................................

5,00
0
5,00
0
183
184
To record accrued salaries.

a. $1,650 (300 + 2,100 750 = 1,650)
b. $5,700 (1,600 + 5,400 1,300 = 5,700)
c. $10,080 (9,600 + 1,840 1,360 = 10,080)
d. $1,375 (6,575 + 800 6,000 = 1,375)
Proof:
(a)
(b)
(c)
(d)
Supplies on handJanuary 1..........
$ 300
$1,600
$
1,360
$1,375
Supplies purchased during the

year.............................................
2,100
5,400
10,08
0
6,000
Total supplies available................. $2,400
$7,000
$11,44
0
$7,375
Supplies on handDecember 31....
(5,700)
(1,84)
0
$1,300
$
9,600
(750)
Supplies expense for the year....... $1,650

(800)
$6,575
184
185

Adjusting entry:
2012
Dec.31
Wages Expense.........................................
1,000
Wages Payable.....................................
1,000
Adjusting entry to record accrued wages for one
day; 5 $200.
Payday entry:
2013
Jan. 4
Wages Expense.........................................
3,000
Wages Payable..........................................
1,000
Cash.....................................................
4,000
Paid employees' accrued and current wages;
5 employees x $200/day x 4 days = $4,000.

201
1
a)
Apr
.
30 Interest Expense..........................
2,080
Interest Payable..............................
2,080
To record accrued interest expense;

0.8% $780,000 10/30.
May
20 Interest Payable...................................
2,080
Interest Expense...................................
4,160
Cash...............................................
6,240
To record payment of accrued and

current
expense; 0.8% $780,000 20/30.
201
185
186
1
b)
Apr
.
30 Salaries Expense...................................
3,600
Salaries Payable..............................
3,600
To record accrued salaries;

$9,000/5 days = $1,800/day;
2 days x $1,800 = $3,600.
May
3 Salaries Payable...................................
3,600
Salaries Expense...................................
5,400
Cash...............................................
9,000

current
salaries; 3 days x $1,800 = $5,400.

201
1
c)
Apr
.
30 Legal Fees Expense...............................
2,50
0
Legal Fees Payable..........................
2,50
0
To record accrued legal fees.
May
12 Legal Fees Payable................................

Cash................................................
2,50
0
2,50
0
To pay accrued legal fees.

186
187
2011
Dec.31
Accounts Receivable..................................
Fees Earned..........................................
To record unbilled fees; 30% $12,000.
3,600
31
Unearned Fees...........................................
Fees Earned..........................................
To record earned fees that had been
collected in advance; 70% $12,000.
8,400
31
Amortization Expense, Computers.............

Accumulated Amortization, Computers
To record amortization on computers.
3,000
31
Amortization Expense, Office Furniture......

Office Furniture..................................
To record amortization on office furniture.
3,500
31
Salaries Expense........................................
Salaries Payable...................................
4,900
31
Insurance Expense.....................................
Prepaid Insurance.................................
To record expired prepaid insurance.
2,600
31
Office Supplies Expense.............................

Office Supplies......................................
To record use of office supplies.
960
31
Utilities Expense..........................................
Utilities Payable.....................................
To record unpaid utility costs.
3,600
8,400
3,000
3,500
140
4,900
2,600
960
140

Analysis component:
The GAAP of matching and revenue recognition requires that adjusting
entries be recorded at the end of each accounting period to ensure
revenues and expenses are allocated to the period in which they were
incurred. If the December 31, 2011 adjustments for Javelin Company
were not recorded, revenues would be understated by $12,000;
expenses would be understated by $15,100; and net income would be
overstated by the difference of $3,100 ($15,100 - $12,000 = $3,100).

187
188

Ayotte Music
Partial Work Sheet
February 28, 2011
Account
Unadjusted
Trial Balance
Debit
Cred
it
Adjustments
Debi
t
Cred
it
Cash.................................. 5,000
Debi
t
Cred
it
5,000
Accounts receivable........... 4,500
Prepaid insurance..............
Adjusted Trial
Balance
5,900
c)
1,40
0
700
b)
250
Equipment......................... 12,00
0
450
12,000
a)
2,400
Accumulated amortization,
equipment..........................................
6,000
Accounts payable...............
1,200
1,200
Jane Adams, capital............
9,000
9,000
Jane Adams, withdrawals.... 3,000

Revenues...........................
Amortization expense,
equipment
3,000
45,00
0
c)
1,400
a)
2,400
Salaries expense................ 29,00

0
Insurance expense.............
8,400
46,40
0
2,400
29,000
b) 250
7,250
7,000
188
189
Totals................................ 61,20 61,20

0
0
4,05
0

4,05 65,000 65,00

0
0
189
190

Ayotte Music
Income Statement
For Year Ended February 28, 2011
Revenue............................................................
$46,400
Operating expenses:
Salaries expense...........................................
$29,00
0
Insurance expense........................................
7,250
Amortization expense, equipment..................
2,40
0
Total operating expenses...........................
38,650
Net income........................................................
$ 7,750
Ayotte Music
Jane Adams, capital, March 1..............................
$ 9,000
Add: Net income................................................
7,750
Total.............................................................
$16,750
Less: Withdrawal by owner................................
3,000
Jane Adams, capital, February 28........................
$13,750

190
191
Ayotte Music
Balance Sheet
February 28, 2011
Assets
Cash.................................................................
$ 5,000
Accounts receivable...........................................
5,900
Prepaid insurance..............................................
450
Office equipment...........
$12,00
0
Less: Accumulated amortization, office

equipment.........................................................
Total assets.......................................................
8,4
00
3,600
$14,950
Liabilities
Accounts payable...............................................
$ 1,200
Owners Equity
Jane Adams, capital...........................................
13,750
Total liabilities and owners equity.....................
$14,950

191
192

Analysis component:
The GAAP which requires the preparation of financial statements is

the time period principle. The time period principle assumes that an
organizations activities can be divided into specific time periods.
Since information must reach decision makers frequently and
promptly, the accounting system needs to prepare reports regularly.
The standard reporting period is one year although many companies
report quarterly.
*Exercise 4-13
a)
Cash.....................................................
Accounts Payable............................

1,800
1,800
192
193
To correct the original entry.
OR
1,800
Cash.............................................
1,800
Office Supplies........................
To reverse the incorrect entry.
1,800
Office Supplies.............................

193
194
1,800
Accounts Payable....................
To journalize the correct entry.

b)
Revenue...............................................
Accounts Receivable........................

4,500
4,500
194
195
OR
4,500
Revenue.......................................
4,500
Cash.......................................
4,500
Cash.............................................

195
196
4,500
Accounts Receivable................

c)
Withdrawals..........................................
Salaries Expense.............................

1,500
1,500
196
197
OR
Cash.....................................................
1,500
Salaries Expense............................
1,500
Withdrawals.........................................

1,500
197
198
Cash..............................................
1,500

198
199
*Exercise 4-13 (concluded)

d)
Accounts Receivable.........................................
750
Revenue.................................................
750

OR
750
Cash.......................................................
750
Cash.................................................................
Revenue.................................................
750
750
Analysis component:
If the error in (b) is not corrected, revenue and net income on the
income statement will be overstated each by $4,500. On the balance
sheet, assets (accounts receivable) and equity will be overstated each
by $4,500.
*Exercise 4-14 (30 minutes)

2011
a) Dec.
1
Supplies Expense................................. 6,000

Cash..............................................
6,000
Purchased supplies.
b)
2 Insurance Expense............................... 2,880
Cash..............................................
2,880
Paid insurance premiums.
c)
15 Cash.....................................................24,000
Remodelling Fees Earned...............
24,000
Received fees for work to be done.
Adjusting entries:
2011
d) Dec. 31 Supplies................................................ 3,840
Supplies Expense...........................
3,840
Adjusted expense for unused supplies on hand.
199
200
e)
f)
31 Prepaid Insurance................................. 2,400

Insurance Expense.........................
Adjusted expense for unexpired coverage;
$2,880 $480.
31 Remodelling Fees Earned.....................16,800
Unearned Remodelling Fees...........
Adjusted revenues for unfinished projects;
$24,000 $7,200.

2,400
16,800
200
201

a) Initial credit recorded in Unearned Fees account:
July 1
Cash................................................
2,000
Unearned Fees...........................
6
Cash................................................
Unearned Fees...........................
8,400
12
Unearned Fees................................
Fees Earned...............................
Completed work for customer.
2,000
18
Cash................................................
Unearned Fees...........................
7,500
27
Unearned Fees................................
Fees Earned...............................
8,400
31
No entry.
b) Initial credit recorded in Fees Earned account:

July 1
Cash................................................
2,000
Fees Earned...............................
6
Cash................................................
Fees Earned...............................
8,400
2,000
8,400
2,000
7,500
8,400
2,000
8,400
12
No entry.
18
Cash................................................
Fees Earned...............................
27
No entry.
31
Fees Earned....................................
7,500
Unearned Fees...........................
7,500
Adjusting entry to reflect unearned fees for unfinished

7,500
7,500
201
202
job.
c) Under the first method:
Unearned fees = $2,000 + $8,400 $2,000 + $7,500 $8,400 =
$7,500
Fees earned = $2,000 + $8,400 = $10,400
Under the second method:
Unearned fees = $7,500
Fees earned = $2,000 + $8,400 + $7,500 $7,500 = $10,400
Chapter 5
EXERCISES
Completing the Accounting

Cycle and Classifying
Accounts

1.
5.
9. C
13. C
2.
6.
10. C
14. A
3.
7.
11. D
15. A
4.
8.
12. D
16. C

Adjusted
Trial
Income
Balance
Statement
No.
TitleDebit
Credit Debit
101 Cash ...............3,000
106 Accounts receivable. 13,100
153 Trucks....................... 41,000
154 Accum. amortization, trucks 16,500
Balance Sheet
and
Statement of
Owners Equity
Credit Debit Credit
3,000
13,100
41,000
16,500

202
203
193 Franchise.................. 15,000

201 Accounts payable.....
7,000
209 Salaries payable.......
1,600
233 Unearned fees..........
1,300
301 Bo Webber, capital. . .
37,750
302 Bo Webber, withdrawals.. 7,200
401 Plumbing fees earned
611 Amortization expense, trucks 5,500
622 Salaries expense...... 18,500
640 Rent expense........... 6,000
677 Misc. expenses......... 3,850
15,000
7,000
1,600
1,300
37,750
7,200
49,000 49,000
5,500
18,500
6,000
3,850
Totals....................113,150113,15033,85049,000 79,300
64,150
Net income...............
15,150
15,150
Totals....................
49,000 49,000 79,300
79,300

203

326
Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 5-3 (25 minutes) Parts 1, 2, and 3
204
Musical Sensations
Work Sheet
Unadjusted
Trial
Balance
Account
Adjustments
Adjusted
Trial
Balance
Income
Statement
Balance
Sheet &
Statement
of Owners
Equity
Debit Credi Debit Credit Debit Credi Debit Credi Debit Credi
t
t
t
t
Cash................... 14,00
0
14,00
0
14,00
0
Accounts
26,00
receivable...........
0
26,00
0
26,00
0
520
520
212,0
00
212,0
00
Office supplies....
950
d)
430
Musical
212,0
equipment..........
00
Accum. amort.
musical equip.
16,20
0
Accounts payable
3,350
Unearned
performance
revenue......
12,40
0
b)
16,20
0
a)
10,60
0

32,40
0
32,40
0
3,350
3,350
1,800
1,800
204
Jim Daley, capital
205
272,0
00
Jim Daley,
52,00
withdrawals........
0
Performance
revenue..............
272,0
00
272,0
00
52,00
0
119,0
00
Salaries expense. 76,00

0
a)
10,60
0
c)
13,80
0
Travelling
42,00
expense..............
0
52,00
0
129,6
00
129,6
00
89,80
0
89,80
0
42,00
0
42,00
0
16,20
0
16,20
0
Totals............... 422,9 422,9

50
50
Amortization
expense,
musical equip......
b)
16,20
0
Salaries payable..
c)
13,80
0
Office supplies
expense..............
d)
430
Totals...............
41,03
0
13,80
0
430
13,80
0
430
41,03 452,9 452,9 148,4 129,6 304,5 323,3

0
50
50
30
00
20
50
Net loss..............

18,83 18,83
0
0
205
Totals...............
206

148,4 148,4 323,3 323,3

30
30
50
50
206

Part 4
$272,000 $52,000 $18,830 = $201,170
or
Jim Daley,
Capital
(With.)
52,000
(Net
Loss)
18,830
272,00
0
(Beg.
bal.)
201,17
0
(End.
bal.)

1. (a) Income = $36,800
2.
(a)
Mar. Income Summary..................................
31
36,800
Capital.............................................
36,80
0
To close the income summary account

to capital.
3. (a)
Capital
63,000

(Beg. bal.)
207
208
$63,000 + $36,800 $17,000 =

$82,800 OR
(With 17,00 36,800

.)
0
82,800
(Net
income)
(End. bal.)
1. (b) Net Loss = $60,000

2.
(b)
June
30
Capital.................................................
Income Summary..............................
60,000
60,00
0
To close the income summary account

to capital.
3. (b)
Capital
114,000 (Beg. bal.)
$114,000 $60,000 =
$54,000 OR
(Net
loss)
60,00
0
54,000 (End. bal.)

208
209

Debit
Rent earned................................................
99,000
Salaries expense.........................................
35,30
0
Insurance expense......................................
4,400
Dock rental expense....................................
12,00
0
Boat supplies expense.................................
6,220
Amortization expense, boats.......................
21,50
0
Totals................................................
79,42
0
Net income............................................
19,58
0
Totals.........................................................
99,00
0
2011
Credit
99,000
99,000
Closing entries:
Dec. Rent Earned............................................

31
99,00
0
Income Summary...............................
99,000
To close the revenue account.
31 Income Summary.....................................
79,42
0
Salaries Expense................................
35,300
Insurance Expense.............................
4,400
Dock Rental Expense..........................
12,000
Boat Supplies Expense.......................
6,220

209
210
Amortization Expense, Boats..............
21,500
To close the expense accounts.
31 Income Summary....................................
19,58
0
Carl Winston, Capital........................
19,580
To close Income Summary.

31 Carl Winston, Capital...............................
Carl Winston, Withdrawals................
18,00
0
18,000
To close the withdrawals account.

210
211

2011
Apr
.
3
0
Closing entries:
Plumbing Fees Earned....................
39,500
Income Summary.......................
39,500
To close revenue to the income

summary.
3
0
Income Summary............................
31,100
Amortization Expense, Trucks.....
5,500
Salaries Expense........................
15,750
Rent Expense.............................
6,000
Advertising Expense...................
3,850
To close expense accounts to

income
summary.
3
0
Income Summary............................
8,400
Frank Block, Capital...................
8,400
To close income summary to

capital.
3
0
Frank Block, Capital........................

Frank Block, Withdrawals...........
7,200
7,200
To close withdrawals to capital.

211
212
Block Plumbing Co.

Post-Closing Trial Balance
April 30, 2011
Acc
t.
No.
Debit
Account
Credit
101
Cash
$
4,100
106
Accounts receivable............................
12,000
153
Trucks...............................................
20,500
154
Accumulated amortization, trucks.......
193
Franchise...........................................
201
Accounts payable...............................
7,000
209
Salaries payable.................................
1,600
233
Unearned fees....................................
1,300
301
Frank Block, capital............................
33,450*
Totals................................................
$
8,250
15,000
$51,600
$51,600
Frank Block,
Capital
*Calculated as:
32,250 + 8,400 7,200 = 33,450
(Adj. Bal,
or
32,25 Apr. 30)

0
(Withdra
wals)
7,200

8,400 (Net income)
212
213

2011
Closing entries:
January Subscription Revenues.....................

31
62,000
Interest Revenue.............................
450
Income Summary.........................
62,450
To close revenues to the income

summary.
31 Income Summary.............................
65,400
Amortization Expense, Equipment
2,000
Rent Expense..............................
7,400
Salaries Expense.........................
.......................................................
56,000

income
summary.
31 Kate Goldberg, Capital.....................
2,950
Income Summary.........................
To close
capital.
income
summary
2,950
to
31 Kate Goldberg, Capital.....................

Kate Goldberg, Withdrawals.........
4,000
4,000

213
214

2011
Dec.31
31
4,000
Closing entries:
Services Revenue .................... 72,000
Income Summary ................
To close the revenue account to the
income summary.
72,000
Income Summary .................... 73,400

Amortization Expense, Equipment
Salaries Expense ................
Insurance Expense ..............
Rent Expense .....................
Supplies Expense ................
To close the expense accounts to the
income summary.
31
Jo Weller, Capital.....................
1,400
Income Summary ................
To close the income summary to capital.
31
Jo Weller, Capital .................... 12,000

Jo Weller, Withdrawals ........
42,000
3,000
22,000
2,400
1,400
12,000

2011
Closing entries:
Sept. Consulting Fees Earned...................
68,000
Income Summary........................
68,000
To close revenues to the income

summary.
30 Income Summary.............................
18,750
Amortization Expense, Office

Equipment......................................
3,500
Rent Expense.............................
1,750

214
215
Wages Expense...........................
13,500

income
summary.
30 Income Summary.............................
49,250
Sandra Sloley, Capital.................

To close
capital.
income
summary
49,250
to
30 Sandra Sloley, Capital......................
19,000
Sandra Sloley, Withdrawals.........
19,000

2011
(1) Dec. 31
Closing entries:
Services Revenue............................
73,000
Income Summary........................
73,000
To close the revenue account to

the
Income Summary.
(2)
31
Income Summary.............................
48,100
Rent Expense.............................
8,600
Salaries Expense........................
20,000
Insurance Expense.....................
3,500
Amortization Expense.................
16,000
To close the expense accounts to

the
income summary.
215
216
(3)
31
Income Summary.............................
24,900
Marcy Jones, Capital ..................
24,900
To close the income summary to

capital.
(4)
31
Marcy Jones, Capital .......................

Marcy Jones, Withdrawals...........
24,000
24,000

216
217

Posted accounts:
Assets
Dec.
31
Rent Expense
80,000
Dec. 31
8,600
Balance
8,600 (2)
Liabilities
38,1
00
Dec. 31
Marcy Jones, Capital

(4)
24,000 41,0
00
Salaries Expense
Dec. 31
20,00
0
Balance
20,00 (2)
0
Dec. 31
24,9
00
(3)
41,9
00
Balance
Insurance Expense
Dec. 31
3,500
Balance
3,500 (2)
Marcy Jones, Withdrawals

Dec.
31
Balanc
e
24,000 24,0
00
(4)
Amortization Expense
Dec. 31
16,00
0
Balance
16,00 (2)
0
Income Summary
(2)
48,100
(3)
24,900
73,0 (1)
00
24,9 Balance
00

217
218
0 Balance
Services Revenue
(1)
73,000
73,0 Dec. 31
00
0 Balance

Jones Consulting
December 31, 2011
Account
Assets................................................
Debit
Credit
$
80,000
Liabilities...........................................
$
38,100
Marcy Jones, Capital...........................
41,900
Totals................................................
$80,000

$80,000
218
219

1. Bill Duggan, Withdrawals; Interest Revenue, and Other Expenses
have not been closed.
2.
2011
June
30
Bill Duggan, Capital......................
71,00
0
Interest Revenue..........................
1,150
Bill Duggan, Withdrawals..........
72,00
0
Other Expenses........................
150
To close interest earned,

withdrawals and
other expenses directly to capital.

Bill Duggan,
Capital
216,2
00
3. $216,200 $71,000
= $145,200
OR
71,00
0
145,2 (Balance
00 )

219
220
Exercise 5-13 (15 minutes) Part A

Adjusted Trial
Account Title
X
X
X
X
Balance
Debit Credit
$
Accounts payable.............................
11,00
0
Accounts receivable.........................
$
59,00
0
9,000
Accumulated amortization, equipment
.......................................................
21,00
Accumulated amortization, truck......
0
Amortization expense......................
3,800
Cash................................................
29,00
0
Equipment.......................................
13,00
0
Franchise.........................................
17,80
0
Gas and oil expense.........................
7,500
Interest expense..............................
4,500
750
Interest payable..............................
Land not currently used in business
52,00
operations.......................................
0
Note 1
35,00
Long-term notes payable
............
0
7,000
Notes payable, due February 1, 2012
Notes receivableNote 2........................
6,000
Patent.............................................
7,000
Prepaid rent....................................
14,00
0
Rent expense...................................
39,00
0
247,0
Repair revenue................................
00
Repair supplies................................
17,00
0

220
221
Repair supplies expense...................
Sid Whimsly, capital.........................
Sid Whimsly, withdrawals.................

Truck...............................................
14,00
0
49,00
0
26,00
0
Unearned repair revenue..................

Totals..............................................
b.
$358,
600
24,05
0
3,
800
$358,
600
$24,050 -$3,800 - $7,500 - $4,500 - $39,000 + $247,000 - $14,000 $49,000 = $153,250.
Analysis component:
Amortization expense, gas and oil expense, interest expense, rent
expense, repair revenue, repair supplies expense, and withdrawals are
all temporary accounts and do not appear on the post-closing trial
balance because their balances were transferred to capital during the
closing process leaving each with a zero post-closing balance. The
adjusted balance of $24,050 in capital is the balance prior to closing all
temporary accounts into it. A capital account balance does appear on
the post-closing trial balance but it is the post-closing balance of
$153,250 as determined in part (b) above. Therefore, the adjusted
capital balance of $24,050 will not appear on the post-closing trial
balance
Note to instructor: Reinforce to the student that the question asks
which account balances from the adjusted trial balance will not appear
on the post-closing trial balance.

221
222

a. Current assets = $59,000 + $29,000 + $2,000 + $14,000 +
$17,000 = $121,000.
b. Property, plant and equipment = -$9,000 - $21,000 + $13,000 +
$26,000 = $9,000.
c. Intangible assets = $17,800 + 7,000 = $24,800.
d. Long-term investments = $4,000 + $52,000 = $56,000.
e. Total assets = $121,000 + $9,000 + $24,800 + $56,000 =
$210,800.
f. Current liabilities = $11,000 + $750 + $5,000 + $7,000 + $3,800
= $27,550
g. Long-term liabilities = $30,000.
h. Total liabilities = $27,550 + $30,000 = $57,550.
i. Total liabilities and owners equity = $210,800.

222
223

DOVER PACIFIC TOURS
Balance Sheet
November 30, 2011
Assets
Current assets:
Cash...................................................................................
$ 5,000
Accounts receivable............................................................
13,000
Prepaid insurance..............................................................
700
Prepaid rent.......................................................................
9,000
Supplies..............................................................................
2,250
Current portion of notes receivable....................................
7,500
$
37,450
Total current assets............................................................
Long-term investments:
13,000
Notes receivable, less $7,500 current portion...................
Property, plant and equipment:

Vehicles..............................................................................
$64,000
Less: Accumulated amortization......................................
17,000
Office furniture...................................................................
$ 6,500
Less: Accumulated amortization......................................
3,600
Total property, plant and equipment..................................
$47,000
2,900
49,900
Intangible assets:
Copyright.........................................................................
1,0
00
Total assets...............................................................................
$101,3

223
224
50
Liabilities
Current liabilities:
Accounts payable..........................................................
$ 11,000
Salaries payable............................................................
900
Unearned touring revenue.............................................
23,000
Notes payable................................................................
4,000
Current portion of long-term notes payable...................
10,000
Total current liabilities.....................................................
$ 48,900
Long-term liabilities:
Long-term notes payable, less $10,000 current

portion.............................................................................
Total liabilities....................................................................
10,500
$59,40
0
Owners Equity
Pat Dover, capital*..............................................................
41,9
50
Total liabilities and owners equity............................................
$101,3
50
*Calculated as Total assets of $101,350 less Total liabilities of $59,400

= $41,950.

224
225
HANSON TRUCKING COMPANY

Balance Sheet
December 31, 2011
Assets
Current assets:
Cash...............................................
$
7,000
16,500
Office supplies................................
2,000
Total current assets.........................
$
25,500

Land...............................................
$
75,000
Trucks.............................................
$170,00
0
Less: Accumulated amortization. . . .
35,00
0
135,000
Total property, plant and equipment
$210,00
0
Total assets..........................................
$235,50
0
Liabilities
Accounts payable............................
$
11,000
Interest payable..............................
3,000
Total current liabilities.....................
$
14,000
Long-term notes payable....................
52,000

225
226
Total liabilities...................................
$
66,000
Owners Equity
Stanley Hanson, capital .....................
169,50
0
Total liabilities and owners equity........
$235,50
0

226
227

a. Withdrawals, tutoring fees earned, rent expense,
amortization expense, and advertising expense have zero
balances because each account was closed at December
31, 2011 resulting in each balance being transferred to
capital leaving a zero balance behind.
b.
2012
Jan. 15 Accounts Receivable...................
8,000
Tutoring Fees Earned..........
8,000
To record revenues earned on

account.
Feb. Advertising Expense...................

20
2,000
Cash...................................
2,000
To record payment for

advertising.
July 7 Cash..........................................
9,000
Accounts Receivable............
9,000
To record collection from

customers.
Dec. Leda Svenson, Withdrawals.........

10
Cash...................................
3,000
3,000
To record cash withdrawals by

owner.

227
228

340

b.
Cash
Dec
31/11
Jul
07/12
Unadj
Bal
2,00
0
9,00
0
Accounts Receivable
2,00
0
Feb
20/12
Dec
31/11
5,00
0
3,00
0
Dec
10/12
Jan.
15/12
8,00
0
Unadj
Bal
4,00
0
6,00
0
Office Equip.
Dec
31/11
Jul
07/12
Accum. Amort., Office

Equipment
20,0
00
Leda Svenson,
Capital
17,1
00
9,00
0
10,0
00
Dec
31/11
Leda Svenson, Withdrawals

Dec
31/11
Dec
31/11
Dec
10/12
Unadj
Bal
Prepaid Rent
Dec
31/11
3,0
00
Unearned Fees
2,9
00
Dec
31/11
Tutoring Fees Earned
-0-
-0-
3,00
0
8,0
00
3,00
0
8,0
00
Dec
31/11
Jan.
15/12
Unadj
Bal
229
Rent Expense
Dec
31/11
-0-
Dec
31/11
-0-
Advertising Expense
Dec
31/11
Feb
20/12
Unadj
Bal
-02,0
00
2,0
00

c.
Svensons Tutoring Clinic

Unadjusted Trial Balance
December 31, 2012
Account
Debit Credit
Cash................................................
Prepaid rent....................................
Office equipment.............................
Accumulated amortization, office
equipment.......................................
Unearned fees.................................
Leda Svenson, capital......................
Leda Svenson, withdrawals..............
Tutoring fees earned........................
Advertising expense........................
Totals..............................................
$ 6,000
4,000
3,000
20,000
3,000
$10,00
0
2,900
17,100
8,000
2,000
$38,000 $38,00
0
d. Journalize adjustments:
2012
Dec. 31 Amortization Expense..................
2,000
Accum. Amort., office

equipment...................................
2,000
To record annual amortization.
31
Unearned Fees............................
2,400
Tutoring Fees Earned............
2,400
To record earned fees.
31
Rent Expense..............................
Prepaid Rent........................
3,000
3,000
To record expired prepaid rent.

230
231

231
232

342

d. Post adjustments:
Cash
Dec
31/11
2,000 2,000
9,000
3,000
Jul
07/12
Unadj
Bal
6,000
Office Equip.
Dec
31/11
20,00
0
Accounts Receivable
Feb
20/12
Dec
31/11
5,00 9,000
0
Dec
10/12
Jan.
15/12
8,00
0
Unadj
Bal
4,00
0
Jul
07/12
Prepaid Rent
Dec
31/11
3,00 3,000
0
Adj Bal
-0-
Accum. Amort., Office

Equipment
10,00
0
Dec
31/11
2,000
Dec
31/12
12,00
0
Adj Bal
Dec
31/12
Unearned Fees
Dec
31/12
2,40 2,900
0
Dec
31/11
500
Adj Bal
233
Leda Svenson,
Capital
17,10
0

Dec
31/11
Dec
31/11
Dec
10/12
Unadj
Bal
-0-
-0-
3,00
0
8,000
3,00
0
8,000
Dec
31/11
Jan
15/12
2,400
Unadj
Bal
Dec
31/12
10,40
0
Rent Expense
Dec
31/11
Dec
31/12
-0-
Adj Bal
3,000
3,000
Dec
31/11
Dec
31/12
Adj Bal
-02,00
0
2,00
0
Adj Bal
Advertising Expense
Dec
31/11
Feb
20/12
Unadj
Bal
-02,00
0
2,00
0
Exercise 517 (continued)

e.
Adjusted Trial Balance
December 31, 2012
Account
Debit Credit
Cash..........................................
$
6,000
Accounts receivable................... 4,000
Office equipment........................ 20,00
0
$12,0
equipment.................................
00
Unearned fees............................
500
Leda Svenson, capital.................
17,10
0
Leda Svenson, withdrawals......... 3,000
Tutoring fees earned..................
10,40
0
Rent expense............................. 3,000
Amortization expense................. 2,000
Advertising expense................... 2,000
Totals........................................ $40,0 $40,0
00
00

234
235

f.
Income Statement
Revenue............................................................
$10,400
Operating expenses:
Rent expense................................................
$3,000
Advertising expense......................................
2,00
0
Amortization expense....................................
2,000
7,000
Net income........................................................
$ 3,400

Leda Svenson, capital, January 1........................
$17,100
Add: Investments by owner...............................
$
0
Net income...............................................
3,40
0
3,400
Total.............................................................
$20,500
Less: Withdrawals by owner..............................
3,000
Leda Svenson, capital, December 31...................
$17,500

235
236

Balance Sheet
December 31, 2012
Assets
Current assets:
Cash...........................................................................................
$ 6,000
Accounts receivable...................................................................
4,000
$
10,000
Total current assets...................................................................

Office equipment.......................................................................
$20,000
Less: Accumulated amortization.............................................
12,000
8,000
$18,000
Total assets......................................................................................
Liabilities
Unearned fees...........................................................................
500
Owners Equity
Leda Svenson, capital...................................................................
17,500
Total liabilities and owners equity...................................................
$18,000

g. Journalize the closing entries:
2012
(1)
Dec. Tutoring Fees Earned..................

10,400
31
Income Summary................

10,400
236
237
To close the revenue

account to
the income summary.
(2)
31 Income Summary........................
7,000
Rent Expense......................
3,000
Amortization Expense..........
2,000
Advertising Expense............
2,000
To close the expense

accounts
to the income summary.
(3)
31 Income Summary........................
3,400
Leda Svenson, Capital.........
3,400
To close the income

summary to
capital.
(4)
31 Leda Svenson, Capital.................

3,000
Leda Svenson,
Withdrawals...............................
3,000
To close withdrawals to
capital.

237

346

g. Post the closing entries:
Cash
Dec 31/11 2,000
9,000
Jul 07/12
2,000
3,000
Accounts Receivable
Feb
20/12
Dec
31/11
Dec
10/12
Jan.
15/12
Unadj Bal 6,000
Unadj
Bal
Office Equip.
5,000
8,000
9,00
0
Jul
07/12
4,000
10,0 Dec
00 31/11
2,00 Dec
0 31/12
12,0 Adj Bal
00
Leda Svenson, Capital

(4) 3,000
17,10 Dec
0 31/11
Dec
31/11
3,400 (3)
Dec
-03,000
Dec
31/11
Adj Bal
Accum. Amort., Office Equip.
Dec 31/11 20,000
Prepaid Rent
3,00
3,00
0
0
Dec
31/12
-0-
Unearned Fees
Dec
31/12
2,90 Dec
2,40
0 31/11
0
500 Adj Bal

-0- Dec
31/11
8,00
0 Jan
239
10/12
17,50
0
Postclosing
balance
Unadj
Bal
15/12
3,000
3,00 (4)
0
8,00 Unadj
0 Bal
2,40 Dec
0 31/12
-0-
(1)
10,4
00
10,4 Adj Bal

00
-0-
Rent Expense
Dec 31/11
Dec 31/12
-0-
Dec
31/11
3,000
-0-
Dec
31/11
2,000
Dec
31/12
Adj Bal
3,000
3,000 (2)
Adj Bal
-0-
Advertising Expense
Feb
20/12
2,000
2,00 (2)
0
Unadj
Bal
-0-
Income Summary
(2)
7,000
10,40 (1)
0
(3)
3,400
3,400 Bal.

239
-02,00
0
2,000 (2)
2,00
0
-0-
240
-0-

240
241
Exercise 517 (concluded)

h.
December 31, 2012
Account
Debit
Cash.........................................
$
6,000
Accounts receivable................... 4,000
Office equipment....................... 20,000
equipment.................................
Unearned fees...........................
Leda Svenson, capital................
Totals....................................... $30,00
0
Credit
$12,00
0
500
17,500
$30,00
0

241
242

Reversing entries are appropriate for adjustments (a) and (e):
2011
Sept.1
Service Fees Earned........................

5,000
Accounts Receivable............
To reverse accrued revenues.
1
2,400
Salaries Expense.................
To reverse accrued
salaries.
1. Adjusting entries:
2011
Oct.31 Rent Expense...........................
3,200
Rent Payable.......................
To record accrued rent expense.
31
Rent Receivable..............................
750
........................................Rent Earned
750
To record accrued rent
revenue.
2. Subsequent entries without reversing:
5,000
2,400
3,200
Nov.5 Rent Payable..........................3,200

Rent Expense...........................
3,200
Cash.................................
6,400
To record payment of two
months rent.
8Cash.........................................1,500
Rent Receivable................
750
........................................Rent Earned
750
To record collection of
two months rent.
3. Reversing entries and subsequent entries:
Nov.1 Rent Payable..........................3,200
Rent Expense....................
3,200
To reverse the accrual of rent
expense.
1Rent Earned..............................750
Rent Receivable................
750
242
243
To reverse the accrual of rent

revenue.
5Rent Expense............................6,400
Cash.................................
6,400
To record payment of two
months rent.
8Cash.........................................1,500
........................................Rent Earned
1,500
To record collection of two
months rent.
Chapter 6
Accounting for
Merchandising Activities
EXERCISES

a
Sales......................
$
240,000
$
140,000
Cost of goods sold. .
126,000
86,000
Gross profit from

sales......................
$
114,000
Operating expenses
95,000
82,000
41,000
146,000
53,000
Net Income (Loss)...
$ 19,000
$
(28,000)
($
8,000)
$
48,000
($
14,000)
$ $462,000 $85,000
75,000
42,000
268,000
46,000
$ 54,000 $33,000 $194,000
$
39,000

Feb.
1 Merchandise Inventory........................
7,000
Accounts Payable..........................
7,000
To record purchase; terms 1/10, n30.
Cash.............................................
2,400
2,400
243
244
To record purchase for cash.
10,000
10,000
9 Office Supplies....................................
900
900
To record purchase; n15.
1 No entry.
0
1 Accounts Payable................................
1
7,000
Cash.............................................
6,930
Merchandise Inventory..................
70
To record payment within discount

period;
$7,000 x 1% = $70 discount.
4
900
Cash.............................................
900
To record payment.
Mar.
3
Cash.............................................

10,000
10,000
244
245
To record payment.

245
246

2011
Mar. 2
Merchandise Inventory ............

3,600
Accounts Payable Blanton Company
3,600
Purchased merchandise on credit.

200
Cash...................................
Paid shipping charges on purchased
merchandise.
200

Merchandise Inventory .......
Returned unacceptable merchandise.
600
600
17

Merchandise Inventory........
Cash...................................
Paid balance within the discount period;
3,600 600 = 3,000; 3,000 x 2% = 60.
18

7,500
Accounts Payable Fleming Corp.
7,500
3,000
60
2,940
21

Received an allowance on purchase.
28

5,400
108
Cash...................................
5,292
7,500 2,100 = 5,400; 5,400 x 2% = 108.

2,100
2,100
246
247

Jan.
4,000
Sales............................................
4,000
To record sale; terms 1/10, n30.
5 Cost of Goods Sold...............................
3,200
3,200
To record cost of sales.
7 Cash...................................................
3,600
Sales............................................
3,600
To record cash sale.
3,000
3,000
9,600
Sales............................................
9,600
8,200
8,200
1 Cash...................................................
5

3,960
247
248
Sales Discounts...................................
40
Accounts Receivable......................
4,000
To record collection within discount

period;
$4,000 x 1% = $40 discount.
Feb.
4 Cash...................................................
9,600
9,600
To record collection.

248
249

Feb.
2,400
Sales............................................
2,400
To record sale; terms 2/10, n30, FOB

destination.
2,000
2,000
2 Delivery Expense or Freight-Out...........
150
Cash.............................................
150
To record delivery expenses for goods

sold.
3 Sales Returns and Allowances..............
1,200
1,200
To record return of merchandise.
1,000
Cost of Goods Sold........................
1,000
To return merchandise to inventory.
Sales............................................
3,800
3,800

destination.

249
250
3,100
3,100
1 Cash...................................................
1
1,176
Sales Discounts...................................
24
1,200
To record collection, less return and

discount;
$2,400 - $1,200 = $1,200 x 2% = $24
discount.
2 Cash...................................................
3
1,200
Sales............................................
1,200

3
950
950
2 Cash...................................................
8
3,800
3,800

250
251

a.
Mar. 1 Merchandise Inventory .......................... 11,000
Accounts Payable - Raintree..............
11,000
11
Accounts Payable - Raintree.................. 11,000

Merchandise Inventory.......................
330
Cash..................................................
10,670
Paid account payable within the discount period;
11,000 x 3% = 330.
b.
Mar. 1 Accounts Receivable Sundown Company
Sales..................................................
Sold merchandise on account.
1
11
11,000
Cost of Goods Sold ................................

Merchandise Inventory ......................
To record cost of sale.
11,000
11,000
7,500
7,500
Cash...................................................... 10,670
Sales Discounts......................................
330
Accounts Receivable Sundown Company
Collected account receivable.
Analysis component:
Amount borrowed to pay the balance owing $10,670.00
Annual rate of interest .................................
8%
Interest per year...........................................$
853.60
Interest per day ($853.60/365).....................$
2.34
Discount taken.............................................$
Interest paid on the 50-day* loan (50 $2.34)
Net savings from borrowing to pay within
the discount period....................................$
330.00
(117.00)
213.00
*60 days in credit period 10 days in discount period = 50 days.

251
252

a.
2011
May11
30,000
Merchandise Inventory ............ 30,000

Accounts Payable Hostel Sales
11

335
Cash...................................
merchandise.
335
12
Accounts Payable Hostel Sales. 1,200

Merchandise Inventory ..........
1,200
20
Accounts Payable Hostel Sales. 28,800

Merchandise Inventory...........
864
Cash......................................
27,936
30,000 1,200 = 28,800; 28,800 x 3% = 864.
b.
2011
May11
30,000
Accounts Receivable Wilson Purchasing

Sales.....................................
30,000
11
Cost of Goods Sold..................... 20,000

Merchandise Inventory...........
12
Sales Returns and Allowances..... 1,200

1,200
Accepted a return from a customer.
12
Merchandise Inventory ..............

Cost of Goods Sold.................

800
20,000
800
252
253
Returned goods to inventory.

21
Cash.......................................... 27,936
Sales Discounts..........................
864
28,800
Collected account receivable;
30,000 12,000 = 28,800; 28,800 x 3% = 864.

253
254

Analysis Component
Amount borrowed to pay the amount owing $27,936.00

Annual rate of interest ................................
5%
Interest per year..........................................$ 1,396.80
Interest per day ($1,396.80/365).................$
Discount taken............................................$
Interest paid on the 80-day* loan (80 $3.83)
Net savings from borrowing to pay within
the discount period.................................$
3.83
864.00
(306.40)
557.60
*90 days in credit period 10 days in discount period = 80 days.

1.
d.
6.
e.
2.
c.
7.
j.
3.
f.
8.
i.
4.
a.
9.
b.
5.
h.
10.
g.

254
255

Merchandise Inventory
Balance, Dec. 31, 2010
37,000
Invoice cost of
purchases....................
190,50
0
Returns by customers . .
2,200
allowances received . . . .
4,100
Transportation-in ........
1,900
Cost of sales transactions
186,00
0
Shrinkage ......................
32,000
Balance, Dec. 31, 2011.
Purchase discounts
received..........................
1,600
Purchase returns and
7,900
Cost of Goods Sold

Represents all entries to
record the cost component
of sales transactions.................
Represents all entries to record

merchandise returned by customers
and restored to inventory during 2011
186,000
Inventory shrinkage
recorded in December
31, 2011,
adjusting entry............
32,000
Balance ......................
215,800
2,20
0
Analysis component:
The shrinkage was $32,000. The cost of merchandise actually sold to
customers was $186,000. The cost of goods sold was $215,800.
Shrinkage therefore was 17% of the actual cost of merchandise sold
($32,000/$186,000 100) or 15% of the total cost of goods sold
($32,000/$215,800 100). As the inventory manager, I would want to
know the cause of this significant shrinkage. Is it breakage or spoilage
that can be controlled? Is it theft caused by weak internal controls?
Reviewing the numbers allows the inventory manager to ask
appropriate questions for the purpose of making good decisions.
255
256

a) 500,000 17,000 3,000 = 480,000 net sales
b) 28,000 + 124,000 = 152,000 total operating expenses
c) 480,000 124,000 = 356,000 cost of goods sold
d) (124,000/480,000) 100 = 25.83%

Analysis component:
The change in the gross profit ratio for the year ended May 31, 2010
was 2.83% (from 23% to 25.83%). This is a favourable change
because Westlawn is generating more gross profit per sales dollar
that will contribute towards the covering of operating expenses.

256
257

Company A
2011
Company B
2010
2011
2010
256,00
Sales..................................
0
160,00
0
110,00
0
50,000
Sales discounts...................
2,560
1,600
1,100
500
Sales returns and

allowances..........................
51,200
16,000
5,500
2,500
202,24
Net sales............................
0
142,40
0
103,40
0
47,000
153,60
Cost of goods sold...............
0
88,000
55,000
25,000
Gross profit from sales........

48,640
54,400
48,400
22,000
Selling expenses.................
17,920
16,000
24,200
9,000
Administrative
expenses............................
25,600
24,000
29,700
11,000
Total operating
expenses............................
43,520
40,000
53,900
20,000
Net income (loss)................

5,120
14,400
(5,500
)
2,000
24.05
Gross profit ratio................. %1
38.20
%2
46.81
%3
46.81
%4
Calculations:
1.
2.
3.
4.
(48,640/202,240) 100 = 24.05%

(54,400/142,400) 100 = 38.20%
(48,400/103,400) 100 = 46.81%
(22,000/47,000) 100 = 46.81%
Analysis component:
Company B has more favourable gross profit ratios for both 2010 and
2011. Company A is showing a lower gross profit ratio than Company B
and decreasing gross profit as a percentage of net sales.
257
258
Note to instructor:
You may wish to engage students in a discussion of other interesting
comparisons in this information. For example:
COGS as a percentage of sales is lower for Company B than
Company A.
Sales discounts as a percentage of sales is constant for both
companies.
Sales returns and allowances are higher as a percentage of sales
for Company A than Company B (which is particularly interesting
considering that Company A has a higher COGS than Company B
you might assume higher quality but then why the higher
returns/allowances?).
Company B has higher operating expenses as a percentage of
sales than Company A.
Company B has more than doubled its sales from 2010 to 2011 in
comparison to the growth for Company A.

258
259

(a)
Purchases.........................
Purchases discounts................
Purchases returns and
allowances..............................
$
90,00
0
(4,000)
(3,000)
(b)
(c)
$
160,00
0
$
122,000
(10,000)
(2,600)
(6,000)
(4,400)
Transportation-in.....................
6,40
0
14,0
00
16,00
0
Cost of goods purchased..........
$
89,400
$
158,000
$
131,000
Beginning inventory.................
$
7,000
$38,400
$
36,000
Cost of goods purchased..........
89,400
158,000
131,000
Ending inventory.....................
Cost of goods sold...................
(4,4)
00
$92,00
0
(30,0)
00
$
166,400
(30,480)
$
136,520
a.
Transportation-in is calculated as the amount needed to make cost

of goods purchased equal the given amount. Cost of goods sold is
calculated the usual way.
b.
Purchases discounts is calculated as the amount needed to make

cost of goods purchased equal the given amount. The beginning
inventory is calculated as the amount needed to make cost of
goods sold equal the given amount.
c.
Cost of goods purchased is calculated the usual way. Then, that

amount is transferred to the lower section and the ending
inventory is calculated as the amount needed to make cost of
goods sold equal the given amount.

259
260

Company A
2011
Company B
2010
2011
2010
180,00
0
90,000
45,000
Merchandise
inventory
(beginning)....................
18,700
22,300
9,875
9,000
Net cost of
merchandise
purchases......................
72,000
104,40
0
49,500
26,100
Merchandise
(16,40
inventory (ending).............. 0)
(18,70
0)
(8,920
)
(9,875
)
Cost of goods sold............

74,300
108,00
0
50,455
25,225
Gross profit from sales........

45,700
72,000
39,545
19,775
Operating expenses............
36,000
54,000
27,000
13,500
Net income (loss)................

9,700
18,000
12,545
6,275
38.08
Gross profit ratio................. %1
40.00
%2
43.94
%3
43.94
%4
120,00
Sales..................................
0
Cost of goods sold:
Calculations:
1.
2.
3.
4.
(45,700/120,000) 100 = 38.08%

(72,000/180,000) 100 = 40.00%
(39,545/90,000) 100 = 43.94%
(25,225/45,000) 100 = 43.94%
Analysis component:
Company B has a stable and more favourable gross profit ratio than
Company A. Company As gross profit ratio decreased from 2010 to
2011 which is unfavourable.

260
261

261
262

(a)
(b)
Invoice cost of merchandise

purchases............................
$
45,00
0
Purchase discounts received........
(2,000) (1,250)
(325)
Purch. returns and allow. received
(1,500)
(750)
(550)
Cost of transportation-in..............
3,200
1,7
50
2,0
00
Total cost of merchandise

purchases...................................
$
44,700
$
19,750
$
16,375
$
3,500
$ 4,800
$
4,500
44,700
19,750
16,375
Merchandise inventory (beginning)

Total cost of merchandise
purchases...................................
Merchandise inventory (ending). . .
Cost of goods sold.......................
(2,2)
00
$46,00
0
$
20,00
0
(c)
(3,7)
50
$
20,800
$
15,25
0
(3,810)
$
17,065
a. Transportation-in is calculated as the amount needed to make

cost of merchandise purchased equal the given amount. Cost of
goods sold is calculated the usual way.
b. Purchase discounts is calculated as the amount needed to make
cost of merchandise purchases equal the given amount. The
merchandise inventory (beginning) is calculated as the amount
needed to make cost of goods sold equal the given amount.
c. Total cost of merchandise purchases is calculated the usual way.
Then, that amount is transferred to the lower section and the
merchandise inventory (ending) is calculated as the amount
needed to make cost of goods sold equal the given amount.

262
263

a) Multiple-step income statement:
COMPU-SOFT
Income
Statement
Net sales.............................................
$26,93
5*
Cost of goods sold...............................
14,80
0
Gross profit from sales........................
$12,13
5
Operating expenses:
Wages expense..............................
$4,20
0
Utilities expense............................
2,100
Amortization expense, store equipment
120
Total operating expenses.............
6,42
0
Income from operations.......................
$
5,715
Other revenues and expenses:

Rent revenue.................................
85
0
Net income..........................................
$
6,565
*Calculated as: 27,700 45 720 = 26,935

b)
201
1
Closing entries:

263
264
Nov
.
3
0
Rent Revenue...................................
850
Sales................................................
27,70
0
Income Summary.........................
28,550
To close temporary credit balance

accounts.
3
0
Income Summary..............................
21,98
5
Sales returns and allowances.......
720
Sales discounts............................
45
Cost of goods sold.......................
14,800
Amortization
expense,
store
equipment........................................
120
Wages expense...........................
4,200
Utilities expense..........................
2,100
To close temporary debit balance

accounts.
3
0
Income Summary..............................
6,565
Peter Delta, capital......................
6,565
To close income summary to capital.
3
0
Peter Delta, capital...........................
3,500
Peter Delta, withdrawals..............
3,500

264
265
c)
Peter Delta,
Capital
$1,635 $3,500 + $6,565
= $4,700 OR
(With
.)
3,50
0
1,635
(Beg. bal.)
6,565
(Net income)
4,700
(End. bal.)
Analysis component:
The gross profit ratio for October is 40% ($32,000 - $19,200 = $12,800
gross profit; $12,800/$32,000 100 = 40%). The gross profit ratio for
November is 45% ($12,135/$26,935 100 = 45.05%). Compu-Soft
generated a higher gross profit per sales dollar in November than in
October which is favourable because this represents a greater
contribution towards the coverage of operating expenses.

265
266

464

a
)
Perdu Sales
Work Sheet
Unadjusted
Trial Balance
Adjustments
Income
Statement
Account
Debit
Credit
Debit
Credi
t
Debit
Credi
t
Balance
Sheet and
Statement of
Owners
Equity
Debi
t
Cash
26,00
0
26,0
00
Merchandise inventory
2,000
2,00
0
Prepaid selling expenses
8,000
Store equipment
40,00
0
1,500
9,000
Accounts payable
14,84
0
Eldon Perdu, capital
6,50
0
40,0
00
store eq.
Salaries payable
Credit
0
45,60
2,500
11,50
0
14,84
0
3,200
3,200
45,60
267
0
Eldon Perdu, withdrawals
3,600
Sales
3,60
0
858,0
00
858,0
00
Sales returns and allowances
33,00
0
33,00
0
Sales discounts
8,000
8,000
Cost of goods sold
424,8
40
424,8
40
Sales salaries expense
94,00
0
Utilities expense, store
28,00
0
Amortization expense, store

equip.
3,200
97,20
0
28,00
0
2,500
2,500
Other selling expenses
70,00
0
1,500
71,50
0
Other administrative expenses
190,0
00
Totals
927,4
40
Net Income
190,
000
927,4
40
7,200
7,200
855,0
40
2,9
60
858,0
00
78,1
00
75,14
0
2,96
0
268
Totals
858,0
00
858,0
00
75,6
00
75,60
0
269

b) Classified multiple-step income statement:
PERDU SALES
Income Statement
Sales.................................................................................
$858,00
0
Less: Sales returns and allowances...............
$33,000
Sales discounts...................................
8,000
41,00
0
Net sales................................................
$817,00
0
Cost of goods sold...................................
424,840
Gross profit from sales......................................................
$392,16
0
Operating expenses:
Selling expenses:
Sales salaries expense.......................
$97,2
00
Other selling expenses.......................
71,5
00
Utilities expense, store......................
28,00
0
Amortization expense, store..............
2,50
0
Total selling expenses........................
$199,20
0
General and administrative expenses:. . .
190,00
0
Total operating expenses......................

389,20
0
269
270
Net income.............................................
Closing entries:
c)
2011
De
c.
$
2,960
3
1
Sales................................................................................
858,000
Income Summary......................
858,000
To close sales.
3
1
Income Summary............................................................
855,040
Sales Returns and Allowances............
33,000
Sales Discounts.................................
8,000
Cost of Goods Sold............................
424,840
Sales Salaries Expense......................
97,200
Utilities Expense...............................
28,000
Selling Expenses...............................
71,500
Amortization Expense, Store

Equipment.............................................
2,500
Administrative Expenses...................
190,000

accounts.
3
1
Income Summary...........................
Eldon Perdu, Capital..........................
2,960
2,960
To close the Income Summary account

to capital.

270
271
3
1
Eldon Perdu, Capital......................

Eldon Perdu, Withdrawals..................
3,600
3,600

271
272

Analysis component:
The gross profit ratio for 2011 is $392,160/$817,000 100 = 48%. The
gross profit ratio for 2010 was $330,000*/$600,000 100 = 55%. The
gross profit ratio decreased from 2010 to 2011 which is unfavourable
since the gross profit generated per net sales dollar has decreased
thereby contributing less towards the coverage of operating expenses
in 2011 than in 2010.
*Sales COGS = GP Operating Expenses = Net Loss, therefore,

$600,000 - ? =
? - $344,000 = -$14,000; GP - $344,000 = -$14,000 so GP = $330,000.
a) 531,000 14,000 7,000 = 510,000

b) Single-step income statement:
SABBA CO.
Income Statement
For Year Ended January 31, 2011
Revenues:
Net sales......................................
$510,000
Expenses:
Cost of goods sold........................
$301,0
00
Selling expenses............................
117,000
General and administrative expenses
109,00
0

272
273
Interest expense............................
750
Total expenses...............................
527,750
Net loss............................................
$ 17,750

273
274

1)
Periodic
No 1 Purchases................
v.
Perpetual
2,8
00
Merchandise Inventory 2,80

0
2,80
0
Accounts Payable
To record purchases
on
Accounts Payable
2,80
0
To record purchases
on
account.
account.
2)
No 5 Accounts Payable....
v.
2,8
00
Purchases Discount
..............................
Cash.................
Accounts Payable....
2,80
0
56
Merchandise
Inventory...............
56
2,74
4
Cash.................
2,74
4
To record cash
payment within
discount period;
To record cash
payment within
discount period;
2,800 x 2% = 56.
2,800 x 2% = 56.
3)
No 7 Cash.......................
v.
Purchases Returns
and
Allowances. . . .
To record cheque
received for return
of purchases
previously paid for
with discount
already taken; 200
196
Cash.........................
196
Merchandise
Inventory.................
196
196
To record cheque
received for
return of
merchandise
previously paid for
with
discount already
taken;

274
275
2% = 196.
200 2% = 196.
4)
No 1 Transportation-In....
v. 0
160
160
Cash.................
To record payment
of freight
charges.
160
160
Cash...................
To record payment
of freight
charges.
5)
No 1 Accounts Receivable
v. 3
Sales.................
To record sale of
merchandise
on credit.
1 No entry.
3
3,0
00
Accounts Receivable.
3,00
0
3,00
0
Sales...................
3,00
0
To record sale of
merchandise
on credit.
Cost of Goods Sold....

Merchandise
Inventory.................
1,50
0
1,50
0
To record cost of
merchandise
sold.

275
276

6)
No 1 Sales Returns and
v. 6 Allowances.............
Accounts
Receivable..............
To record return of
merchandise bought
on
account.
1 No entry.
6
400
Sales Returns and

Allowances.............
400
400
Accounts
Receivable..............
400
To record return of
merchandise bought
on
account.
Cost of Goods Sold
200
200
To record return of
merchandise by
customer.
*Exercise 6-19
Feb.
1 Purchases...........................................
7,000
7,000
5 Purchases...........................................
2,400
Cash.............................................
2,400
To record purchase for cash.
6 Purchases...........................................
10,000
10,000

276
277
9 Office Supplies....................................
900
900
To record purchase; n15.
1 No entry.
0
1
7,000
Cash.............................................
6,930
Purchase Discounts.......................
70
To record payment within discount

period;
$3,500 x 1% = $35 discount.
4
900
Cash.............................................
900
To record payment.
Mar.
3
10,000
Cash.............................................
10,000
To record payment.

2011
Ma
r
2 Purchases...........................................................................

3,600
277
278
Accounts Payable Blanton Company..................
3,600
3 Transportation-in.....................................
200
Cash...........................................
200

merchandise.
4 Accounts Payable Blanton Company.......
600
Purchase Returns and Allowances.....
600
17 Accounts Payable Blanton Company.......
3,000
Purchase Discounts................................................
60
Cash...............................................
2,940

3,600 600 = 3,000; 3,000 x 2% = 60.
18 Purchases................................................
7,500
Accounts Payable Fleming Corp.....
7,500
21 Accounts Payable Fleming Corp.............
2,100
Purchase Returns and Allowances.....
2,100
Received an allowance on purchase.
28 Accounts Payable Fleming Corp.............

5,400
278
279
Purchase Discounts..........................
108
Cash...............................................
5,292

7,500 2,100 = 5,400; 5,400 x 2% = 108.

279
280

Jan.
4,000
Sales............................................
4,000
7 Cash...................................................
3,600
Sales............................................
3,600
9,600
Sales............................................
9,600
1 Cash...................................................
5
3,960
Sales Discounts...................................
40
4,000
To record collection within discount

period;
$2,000 x 1% = $20 discount.
Feb.
4 Cash...................................................
9,600
9,600

280
281

Feb.
2,400
Sales............................................
2,400

destination.
2 Delivery Expense or Freight-Out...........
150
Cash.............................................
150
To record delivery expenses for goods

sold.
3 Sales Returns and Allowances..............
1,200
1,200
3,800
Sales............................................
3,800

destination.
1 Cash...................................................
1
1,176
Sales Discounts...................................
24
1,200
To record collection, less return and

discount;
$2,400 - $1,200 = $1,200 x 2% = $24
discount.

281
282
2 Cash...................................................
3
1,200
Sales............................................
1,200
2 Cash...................................................
8
3,800
3,800

282
283

a)
2011
Mar. Purchases...........................................................................
1
11,000
Accounts Payable Raintree.............
11,000
11 Accounts Payable Raintree...............................................
11,000
Purchase Discounts ...............................................
330
Cash...............................................
10,670
Paid account payable within the discount

period;
11,000 x 3% = 330.
b)
2011
Mar. Accounts Receivable Sundown Company. .
1
11,000
Sales...............................................
11,000
11 Cash........................................................
10,670
Sales Discounts........................................
330
Accounts Receivable Sundown

Company.........................................
11,000
Collected account receivable.

283
284

a)
2011
May Purchases...........................................................................
11
30,000
Accounts Payable Hostel Sales............................
30,000
11 Transportation-In................................................................
335
Cash.......................................................................
335

merchandise.
13 Accounts Payable Hostel Sales................
1,200
Purchase Returns and Allowances..........................
1,200
20 Accounts Payable Hostel Sales.......
28,800
Purchase Discounts................................................
864
Cash...............................................
27,936
Paid balance within the discount

period;
30,000 1,200 = 28,800; 28,800 x 3%
= 864.
b)
2011

284
285
May Accounts Receivable Wilson Purchasing...........................

11
30,000
Sales......................................................................
30,000
12 Sales Returns and Allowances............................................
1,200
Accounts Receivable Wilson

Purchasing......................................
1,200
Accepted a return from a customer.
21 Cash...................................................................................
27,936
Sales Discounts........................................
864

Purchasing......................................
28,800
Collected account receivable;

30,000 1,200 = 28,800; 28,800 x 3% =
864.

285
286

a. Gross profit from sales...............
$145,000
Less: Operating expenses..........
?
Net income................................
65,000
Therefore:
Total operating expenses...........
80,000
b. Sales.........................................
$340,000
Less:..................Sales discounts
Sales returns.......................
19,500
Net sales...................................
$320,500
Less: Cost of goods sold.............
?
Gross profit from sales...............
$145,000
Therefore:
Cost of goods sold.....................
$175,500
$
$
14,000
c. Merchandise inventory (beginning)

30,000
Invoice cost of merchandise purchases
$175,000
Less:............Purchase discounts
Purchase returns.................
6,000
Net purchases ..........................
$165,400
Add: Transportation-in ..............
11,000
Total cost of merchandise purchased
176,400
Goods available for sale ............
$206,400
Less: Merchandise inventory (ending)
?
Cost of goods sold (from b)........
$175,500
Therefore:
Merchandise inventory (ending).
30,900
$ 5,500
3,600
286
287
d. (145,000/320,500) x 100 = 45.24% Gross Profit Ratio (rounded to

two decimal places)
Analysis component:
The gross profit ratio for 2011 is 45.24%. In comparison with the 2010
gross profit ratio of 47%, this represents an unfavourable change. This
is unfavourable because the gross profit generated per net sales dollar
decreased in 2011 from 2010 thereby contributing less towards the
coverage of operating expenses in 2011 than in 2010.

287
288


DEWERS STOPN SHOP
Work Sheet
Unadjusted
Trial
Balance
No.
Account
101 Cash...................
106 Accounts
receivable...........
119 Merchandise
inventory............
125 Store supplies.....
201 Accounts payable
209 Salaries payable. .
Debit Credi
t
7,40
0
3,60
0
2,40
0
1,20
0
280
301 Mi Dewer, capital.
475
302 Mi Dewer,
withdrawals.........
413 Sales...................
750
414 Sales returns and

allowances..........
505 Purchases...........
290
6,40
11,5
70
12,0
00
Balance
Sheet and
Income
Statement
Adjustment
Statemen of Owners
s
t
Equity
Debit Credit Debi Credit Debi Credit
t
t
7,40
0
3,60
0
2,40 2,720 2,72
0
0
(a)
900
300
280
(b)
120
120
11,57
0
750
290
6,40
12,00
0
289
506
507
622
640
651
0
Purchase discounts.....................
250
Transportation-in.
160
Salaries expense.
1,40
0
Rent expense......
500
Store supplies
expense..............
Totals...............
24,1 24,1
00
00
Net income..........
Totals
0
(b)
120
(a)
300
4
20
160
1,52
0
500
30
0
420 11,5
70
3,40
0
14,9
70
250
14,97 15,3
0
70
11,97
0
3,400
14,97 15,3
0
70
15,37
0
290

a
)
Net Sales:
b
)
Cost of goods purchased:
c)
Sales..................................................
Sales returns and allowances................
Sales discounts...................................
Net sales.............................................
$445,000
(25,000)
(16,000)
$404,000
Purchases................................................
Purchases returns and allowances............
Purchase discounts..................................
Transportation-in.....................................
Cost of goods purchased..........................
$286,000
(22,000)
(11,400)
8,800
$261,400
Cost of goods sold:

Beginning inventory................................
Cost of goods purchased..........................
Goods available for sale............................
Ending inventory.....................................
Cost of goods sold....................................
$ 15,000
261,400
$276,400
(11,000)
$265,400
d) Multiple-step income statement:
FOX
Income
For Year Ended March 31, 2011
FIXTURES
Net sales ............................................. $404,000

Cost of goods sold................................
Gross profit from sales.........................
Operating expenses:
Selling expenses................................ $69,000
General and administrative expenses 33,500
Total operating expenses...............
Income from operations........................
Interest revenue................................
Net income...........................................
CO.
Statement
265,400
$138,600
102,500
$ 36,100
1,200
$ 37,300
291

a)
$33,700 $1,740 = $31,960 Net sales
b)
$6,200 + $16,676 $110 $28 + $380 $2,460 = $20,658 Cost
of goods sold
c) Classified multiple-step income statement:
JOHNS ELECTRONICS
Income Statement
Sales.............................................
$33,70
0
Less: Sales returns and allowances.........
1,7
40
Net sales........................................
$31,96
0
Cost of goods sold:

Merchandise inventory, March 31, 2011.
$
6,200
Purchases..................................$16,676
Less: Purchase discounts....................
Purchase returns and allowances
28
..
110
Net purchases............................
.....................................................$16,538
Add: Transportation-in............
380
292
Cost of goods purchased.............
16,91
8
Cost of goods available for sale...
$23,11
8
Less: Merchandise inventory, April 30, 2011
2,460
Cost of goods sold..........................
20,65
8
Gross profit from sales............................
$
11,302
Operating expenses:...............................
Selling expenses:
Wages expense, selling...............
$8,000
Amortization expense, delivery trucks. .
640
Telephone expense, store....................
340
Total selling expenses................
$8,980
General and administrative expenses:
Wages expense, office................
2,800
Telephone expense, office...................
150
Total general and administrative expenses
2,950
Total operating expenses............
11,9
30
Operating loss........................................
$
628

Interest expense................................
1
30
Net loss..................................................
$
758
293

d)
2011
Closing entries:
Apr 3 Merchandise Inventory.......................

.
0
2,460
Purchases Returns and Allowances......
110
Purchases Discounts..........................
28
Sales.................................................
33,700
Income Summary.....................
36,298
To close temporary credit balance

accounts.
3 Income Summary...............................
0
37,056
Merchandise Inventory............
6,200
Sales Returns and Allowances.........
1,740
Purchases......................................
16,676
Transportation-In............................
380
Amortization Expense, Delivery

Trucks...............................................
640
Wages Expense, Office....................
2,800
Wages Expense, Selling...................
8,000
Telephone Expense, Office..............
150
Telephone Expense, Store...............
340
Interest Expense.............................
130

accounts.
294
3 John Yu, Capital..........................

0
758
Income Summary.....................
758
To close income summary to capital.
3 John Yu, Capital..................................

0
9,200
John Yu, Withdrawals...............
9,200
Part e:
John Yu, Capital
$30,300 $9,200 - $758 =

$20,342 OR
(Net
loss)
758
(With.)
9,200
30,300 (Beg.
bal.)
20,342 (End.
bal.)
295
June 1

GST Receivable .......................
Accounts Payable ...............
To record credit purchase;
$2,000 x 6% = 120 GST.
2,000
120
2,120
Accounts Receivable ...............

1,596
PST Payable .......................
112
GST Payable .......................
84
Sales ..................................
1,400
To record credit sale; $1,400 x 8% = 112 PST;
$1,400 x 6% = $84 GST.
Cost of Goods Sold...................

1,000
1,000
June 1
Purchases ...............................
GST Receivable .......................
Accounts Payable ...............
To record credit purchase;
$2,000 x 6% = $120 GST.
2,000
120
2,120
Accounts Receivable ...............

1,596
PST Payable .......................
112
GST Payable .......................
84
Sales ..................................
1,400
To record credit sale; $1,400 x 8% = 112 PST;
$1,400 x 6% = $84 GST.
Chapter 7
Merchandise Inventory and Cost of Sales
EXERCISES
296
(a) FIFO perpetual

Date
Purchases
Unit
s
Jan
.
Unit
Cost
Sales (at
cost)
Total
Cost
Unit
Cost
Cost of
Goods Unit
Sold
s
Unit
Cost
Total
Cost
1 Beginning inventory
100 @$10. =$
00
1,0
00
1
0
Ma
r.
Uni
ts
Inventory
Balance
100 @$10. =
$
00
1,000
90 @$10. =
00
1 250 @$15. =$
4
00
$
900
3,7
50
1
5
1 @$10. =
0
00
$
100
13 @15.0 =
0
0
1,950
10 @$10. =
00
$
100
10 @$10. =
00
$
100
250 @15.0 =
0
3,
750
120 @$15. =
$
00
1,800
120 @$15. =
$
00
1,800
Jul.
3 400 @$20. =$
0
00
8,0
00
400 @20.0 =
0
12 @$15. =
0
00
Oct 5
.
Total
18 @20.0 =
0
0
750
$12,75
0
53
0
Cost of goods available =

for sale
sold
Gross profit calculation under FIFO:
8,
000
$
1,800
3,60 220 @$20. =
$
0
00
4,400
$8,350 220
Cost of goods
+
inventory
$4,400
Ending
297
Sales (530 units

$40)......................
$21,20
0
Cost of goods sold......
8,35
0
Gross profit................
$12,85
0
298

(b) Moving weighted-average perpetual
Inventory Balance
Date
Purchases
Units
Unit
Cost
Sales (at cost)
Total
Cost
Unit
s
Unit
Cost
Cost of
Goods
Sold
(b) (a)
(b)
Tot Averag
al
e
Uni Cost/Un
ts
it
Total
Cost
(a)
Inventory Balance
Calculations
Beginning inventory
Ja
n.
100 @ $1 = $
0
10
00
100
$10.00
$
1,000.00
100
10
90 @ $10.0 =
0
$
900.00
@ $10.0 =
90
0
900.00
10
Ma 14
r.
250 @ $1 = $
5
$14.81
$
3,850.00
14 @ $14.8 =
$
0
1
2,073.40
400 @ $2 = $
0
10
$
100.00
10
$
100.00
3,750
.00
260
$
3,850.0
0
260
$
3,850.0
0
@ $14.8 =
140
1
2,073.4
0
120
30
$
100.00
250 @ $15.0 =
0
260
Jul
y
$10.00
3,7
50
15
$
1,000.0
0
$14.81
$
1,776.60
8,0
00
120
$
1,776.6
0
120
$
1,776.6
0
40 @ $20.0 =
0
0
520
$18.80
$
9,776.60
8,000
.00
520
$
9,776.6
0
520
$
9,776.6
0
299
Oc
t.
30 @ $18.8 =
$
0
0
5,640.00
@ $18.8 =
300
0
5,640.0
0
220
Total
750
$12,750 53
0
Cost of goods
available for sale
=
sold
$18.80
$8,613.4 220
0
Cost of goods
+
inventory
$
4,136.60
$ 4,136.
60
Ending
Gross profit calculation under Weighted-average:
Sales (530 units

$40).....................
$21,200.
00
Cost of goods sold.....
8,613.4
0
Gross profit...............
$12,586.
60
220
$
4,136.6
0
300

(c) LIFO perpetual
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Total
Cost
Sales (at
cost)
Uni
ts
Unit
Cost
Inventory
Balance
Cost of
Goods Unit
Sold
s
Total
Cost
100 @$10. =
$
00
1,000
1
0
Ma
r.
Unit
Cost
100 @$10. =
$
00
1,000
90 @$10. =
00
1 250 @$15. =
$
4
00
3,750
1
5
14 @$15. =
0 00
$
900
10 @$10. =
00
$
100
10 @$10. =
00
$
100
250 @15.0 =
0
3,7
50
10 @$10. =
00
$
100
$ 110 @15.0 =
2,100
0
1,
650
10 @$10. =
00
$
100
110 @15.0 = 1,650

0
Jul.
3 400 @$20. =
$
0
00
8,000
400 @20.0 =
0
8,
000
10 @$10. =
00
$
100
110 @15.0 = 1,650

0
Oct 5
.
30 @$20. =
0
00
$ 100 @20.0 =
6,000
0
2,
000
301
Total
750
$12,7
50
Cost of goods available

for sale
=
53
0
$9,000 220
Cost of goods sold
+
Gross profit calculation under LIFO:
Sales (530 units $21,200

$40).....................
9,000
$12,200
$3,750
Ending inventory
302

Specific identification
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Total
Cost
Sales (at
cost)
Uni
ts
Unit
Cost
Inventory
Balance
Cost of
Goods Unit
Sold
s
Total
Cost
100 @$10. =
$
00
1,000
1
0
Ma
r.
Unit
Cost
100 @$10. =
$
00
1,000
90 @$10. =
00
$
900
1 250 @$15. =
$
4
00
3,750
1 @$10. =
0
00
1
5
13 @15.0 =
0
0
10 @$10. =
00
$
100
10 @$10. =
00
$
100
250 @15.0 =
0
3,
750
$
100
120 @$15. =
$
1,950
00
1,800
120 @$15. =
$
00
1,800
Jul.
3 400 @$20. =
$
0
00
8,000
60 @$15. =
00
Oct 5
.
Total
24 @20.0 =
0
0
750
$12,7
50

for sale
=
53
0
400 @20.0 =
0
8,
000
60 @$15. =
00
$
900
4,80 160 @20.0 =

0
0
3,
200
$
900
$8,650 220
Cost of goods sold
$4,100
Ending inventory
303
Gross profit calculation under Specific Identification:

$40).....................
8,650
$12,550
304

1.
Jan. 1
120 units
Mar. 7
July 28
Oct. 3
250 units
500 units
450 units
@
@
@
Totals
1,320 units
$6.0
0
5.60
5.00
4.60
$720
=
=
=
1,400
2,500
2,07
0
$6,69
0
available for
cost of goods
sale
available for sale
2.
Units sold:
Units remaining in ending inventory:
Jan. 10
Mar. 15
Oct. 5
Totals
1,320 units available for sale less 795 units sold

= 525 units remaining in ending inventory.
70 units
125 units
600 units
795 units
3.(a) Moving weighted-average perpetual

Inventory Balance
Date
Purchases
Uni
ts
Uni
t
Cos
t
Total
Cost
Sales (at cost)
Unit
Units Cost
Cost of
Goods
Sold
(a)
(b)
(a)
Tot Avera
al
ge
Uni Cost/
ts
Unit
(b)
Total
Cost
Inventory Balance
Calculations
Beginning inventory
Jan.
120 @ $6. =
$
00
720.00
120 $6.00
$
720.00
120
10
70 @ $6. =
$
00
420.00
$
720.00
@ $6. =
70
00
420.00
50 $6.00
$
300.00
50
$
300.00
305
50
Mar
.
250 @ $5. =
$
60
1,400.0
0
25 @ 5.6 = 1,400.
0
0
00
300 $5.67
15
$
1,700.0
0
125 @ $5. =
$
67
708.75
500 @ $5. =
$
00
2,500.0
0
$
3,491.2
5
450 @ $4. =
$
60
2,070.0
0
600 @ $4. =
$
94
2,964.00
1,32
0
$6,690. 795
00
Cost of goods available for

sale
=
$1,700.
00
175
$
991.25
175
$
991.25
675
$3,491.
25
675
$3,491.
25
1,1
25
$5,561.
25
1,1
25
$5,561.
25
@ 4.9 =
600
6 2,964.0
0
525 $4.95
$
* 2,597.2
5
Total
300
45 @ 4.6 = 2,070.
0
0
00
1,1 $4.94
$
25
5,561.2
5
$1,700.
00
500 @ 5.0 = 2,500.

0
00
675 $5.17
Oct
.
300
@ 5.6 =708.75
125
7
175 $5.66
$
* 991.25
July 28
$
300.00
$4,092.7 525
5
$2,597.
25
Cost of goods sold Ending inventory

+
525
$2,597.
25
306
*cost/unit changed due to rounding
307

3.(b) FIFO perpetual
Date
Purchases
Uni
ts
Unit
Cost
Sales (at
cost)
Total
Cost
Unit
s
Uni
t
Cos
t
Inventory
Balance
Cost
of
Goods Unit
Sold
s
Unit
Cost
Total
Cost
Jan. 1 Beginning inventory

120 @ $6. =
00
$
720
1
0
Ma
r.
7 250 @ $5. =
60
70 @
2 500 @ $5. =
8
00
$
420
$
1,400
1
5
Jul.
$6. =
00
120 @ $6.0 =
0
$
720
50 @ $6.0 =
0
$
300
50 @ $6.0 =
0
$
300
25 @ 5.60 =
0
1,4
00
50 @
$6. =
00
$
300
7@
5
5.6 =
0
175 @ $5.6 =
420
0
$
980
175 @ $5.6 =
0
$
980
50 @ 5.00 =
0
2,5
00
175 @ $5.6 =
0
$
980
$
2,500
500 @ 5.00 = 2,500

Oct
.
3 450 @ $4. =
60
$
2,070
45 @ 4.60 =
0
2,0
70
17 @
5
$5. =
60
$
980
75 @ $5.0 =
0
$
375
42 @
5.0 =
2,1
45 @ 4.60 =
2,0
308
5
Total
1,32
0
$6,690 79
5

for sale =
25
70
$4,24 525
5
$2,44
5
Cost of goods sold

+
Ending inventory
309

3.(c) LIFO perpetual
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Sales (at
cost)
Total
Cost
Cost of
Goods Unit
Sold
s
$
720
1
0
7 250 @ $5. =
60
70 @$6.0 =
0
2 500 @ $5. =
8
00
$
420
$
1,400
1
5
Jul.
Unit
Cost
Unit
Cost
Total
Cost
120 @ $6. =
00
Ma
r.
Uni
ts
Inventory
Balance
$
720
50 @$6.0 =
0
$
300
50 @$6.0 =
0
$
300
25 @5.60 =
0
1,400
12 @$5.6 =
5
0
$
2,500
120 @$6.0 =
0
$
700
50 @$6.0 =
0
$
300
12 @5.60 =
5
70
0
50 @$6.0 =
0
$
300
125 @5.60 =
700
50 @5.00 =
0
2,50
0
50 @$6.0 =
0
$
300
125 @5.60 =
700
500 @5.00 = 2,500

Oct 3 450 @ $4. =
.
60
$
2,070
45 @4.60 =
0
2,07
0
310
5
Total
1,32
0
$6,690

for sale
=
50 @$6.0 =
0
$
300
45 @$4.6 =
0
0
$ 125 @5.60 =
2,070
700
15 @5.00 =
0
75 350 @5.00 =
0
1,75
0
79
5
$3,940 525
Cost of goods sold
+
$2,750
Ending inventory
311

Specific identification perpetual
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Sales (at
cost)
Total
Cost
Cost of
Goods Unit
Sold
s
$
720
1
0
70 @$6.0 = $
0
420
7 250 @ $5.6 =
$
0
1,400
1
5
Jul.
Unit
Cost
Unit
Cost
Total
Cost
120 @ $6.0 =
0
Ma
r.
Uni
ts
Inventory
Balance
2 500 @ $5.0 =
$
8
0
2,500
120 @$6.0 =
0
$
720
50 @$6.0 =
0
$
300
50 @$6.0 =
0
$
300
250 @5.60 =
1,4
00
25 @$6.0 = $
0
150
25 @$6.0 =
0
$
150
10 @5.60 =
0
560 150 @5.60 =
8
40
25 @$6.0 =
0
$
150
150 @5.60 =
840
500 @5.00 =
2,5
00
25 @$6.0 =
0
$
150
150 @5.60 =
840
500 @5.00 = 2,500

Oct 3 450 @ $4.6 =
$
.
0
2,070
45 @4.60 =
0
2,0
70
312
5
Total
1,32
0
$6,69
0

for sale =
25 @$6.0 =
0
$
150
150 @5.60 =
840
32 @$5.0 =
0
0
$ 180 @5.00 =
1,600
900
28 @4.60 =
0
1,28 170 @4.60 =

8
7
82
79
5
$4,018 525
Cost of goods sold
+
$2,672
Ending inventory
313

TROUT COMPANY
Income Statement
For year ended December 31, 2011
Moving
Weighted
Average
Specific
Identification
FIFO
LIFO
Sales ......................
$11,925$11,925.00
$11,925.....$11,925
(795 units $15 selling price)
Cost of goods sold....
4,018
4,092.75 4,245
3,940
Gross profit.............. $ 7,907 $ 7,832.25$ 7,680 $ 7,985
Operating expenses.
1,250
1,250.00 1,250
1,250
Net income.............. $ 6,657 $ 6,582.25 $ 6,430 $
6,735
1) The LIFO method results in the highest net income with $6,735.
2) The weighted average net income of $6,582.25 does fall between
FIFO net income ($6,430) and LIFO net income ($6,735).
3) If costs were rising instead of falling then the FIFO method would
probably result in the highest net income.
Exercise 7-6
Purchases/Transport
ation-In/ (Purchase
Returns/Discounts)
Date
Ma
r.
1
2
$2,425.
$97.00
00
(Returns to
Inventory)
Balance in Inventory
Unit Cost/U
Unit Cost/U Total Uni Avg
Total
s nit
Total $ s
nit
$
ts Cost/Unit $
Broug
ht
Forwa
rd
Cost of Goods Sold/
25
$95.00
$4,750
.00
75
95.67
7,175.
00
95.67
1,148.
04 63
95.67
6,026.
96
95.67
(191.
34) 65
95.67
6,218.
30
50
12
(2)
314
7
1
7
48
15
4,592.
95.67
16 17
1,380.0
92.00
0
2
8
32
25
93.94
2,348.
50
95.66
1,626.
14
93.94
3,006.
14
93.95 657.64
Analysis component:
The gross profit ratio for Product W506 for March 2011 is 35.71%
calculated as net March sales of $12,284 (83 units $148) less March
cost of goods sold of $7,897.36 = $4,386.64 gross profit $12,284 = .
3571 100.
315

a. LCM applies to inventory as a whole: $14,260
b. LCM applied separately to each product: $13,792
Calculations:
Per
Unit
Inve
ntor
y
Ite
ms
Uni
ts
on
Ha
nd
BB
22
FM
15
MB
36
SL
40
c.
C
N
o
R
s
V
t
$10 $10
0
8
15
14
6
4
19
18
0
2
72
87
Tot
al
Tot
al
Co
st
NR
V
$2,20
0
2,34
0
6,84
0
2,88
0
$14,2
60
$2,37
6
2,16
0
6,55
2
3,48
0
$14,5
68
LCM applied
to:
a.
b.
Inve
Eac
ntory
h
as a
Whol
e
$14,2
60
Pro
du
ct
$2,20
0
2,16
0
6,55
2
2,88
0
$13,
792
2011
Dec. Cost of Goods Sold.............................
31
Merchandise Inventory..............
To write inventory down to market;
14,260 13,792 = 468

1. $900,000 $500,000 = $400,000
468
468
316
2.
For years ended
Income statement information
December 31, 2011,

2012, and 2013
actually reported for

years ended December 31,
income statement
information
should have been
reported as:
Sales
2011
$900,000
2012
$900,0
00
2013
$900,
000
$900,
000
Cost of goods
sold:
Beginning
inventory
Add: Purchases
Less: Ending
inventory
Cost of goods
sold
Gross profit
$200,00
0
$200,
000
$180,
000
$200,
000
500,000
500,0
00
500,0
00
500,0
00
200,00
0
180,
000
200,
000
200,
000
500,000
$400,000
520,0
00
480,
000
500,
000
$380,0
00
$420,
000
$400,
000
317

Goods available for sale:
Inventory, January 1
Purchases
Purchase returns
Transportation-in
Goods available for sale
Less: Estimated cost of goods sold:
Sales
Estimated cost of goods sold
[$2,000,000 (1 30%)]
....
$ 450,000
$1,590,000
(23,100)
37,600 1,604,500
....
$2,054,500
$2,000,000
....
(1,400,000)
Estimated March 31 inventory

$ 654,500
At Cost
At Retail
Beginning inventory
$63,800.00 $
128,400.00
Net purchases
115,620.00
196,800.00
$179,420.00
$325,200.00
Deduct net sales at retail
260,000.00
Ending inventory at retail
$ 65,200.00
Cost ratio: ($179,420/$325,200) 100 = 55.17%
Ending inventory at cost ($65,200 55.17%)
$35,970.84
a. $54,600 55.17% = $30,122.82
b.
At Cost
Estimated inventory that should have
been on hand ......................
Physical inventory................................
Inventory shrinkage..............................
At Retail
$35,970.84
30,122.82
$ 5,848.02
$65,200.00
54,600.00
$ 10,600.00
318

Ending Cost of
InventoryGoods Sold
a. Weighted-average cost ($6,600/1,320 = $5.00):
$5.00 50 .........................................
250
$6,600 $250 ....................................
6,350
b. FIFO:
50 $4.40 .........................................
$6,600 $220 ....................................
220
6,380
c. LIFO:
50 $6.00 .........................................
$6,600 $300 ....................................
300
6,300
FIFO provides the lowest net income because it has the highest cost
of goods sold due to decreasing unit costs.
Ending Cost of
InventoryGoods Sold
a. FIFO:
(50 $2.86) + (100 $2.50) ............
393
(120 $2.00) + (250 $2.30) + (400 $2.50)
1,815
b. LIFO:
(120 $2.00) + (30 $2.30) ............
309
(50 $2.86) + (500 $2.50) + (220 $2.30)
1,899
c. Weighted-average cost ($2,208/920 = $2.40):
$2.40 150 .......................................
360
$2.40 770 .......................................
1,848
LIFO provides the lowest net income because it has the highest cost
of goods sold due to rising unit costs.
319

Ending inventory:
Units
Cost/Un
it
Total Cost
Beginning inventory
80 @
$2.00 =
$160.00
March 7 purchase
22 @
2.30 =
50.60
July 28 purchase
48 @
2.50 =
120.00
150
$330.60
Cost of goods sold:

Cost of goods available for sale less Ending inventory = Cost of goods
sold
$2,208.00 $330.60 = $1,877.40

Merchandise turnover
2012:
$ 643,825
($96,400 +
$86,750)/2
2011:
$ 426,650
= 7.0 times
= 4.8 times
($86,750 +
$91,500)/2
Days sales in inventory
2012:
$
96,40 365
0
$643,
825
= 54.7 days
320
2011:
86,75 365
0
$426,
650
= 74.2 days
It appears that Russo has lower levels of merchandise inventory

on hand which is generally favourable provided customers are
not being turned away because of out-of-stock items.
Chapter 7
Merchandise Inventory and Cost of Sales
EXERCISES
(a) FIFO perpetual
Date
Purchases
Unit
s
Jan
.
Unit
Cost
Sales (at
cost)
Total
Cost
Unit
Cost
Cost of
Goods Unit
Sold
s
Unit
Cost
Total
Cost
100 @$10. =$
00
1,0
00
1
0
Ma
r.
Uni
ts
Inventory
Balance
1 250 @$15. =$
4
00
100 @$10. =
$
00
1,000
90 @$10. =
00
$
900
3,7
50
1 @$10. =
0
00
$
100
10 @$10. =
00
$
100
10 @$10. =
00
$
100
250 @15.0 =
0
3,
750
321
1
5
13 @15.0 =
0
0
120 @$15. =
$
1,950
00
1,800
120 @$15. =
$
00
1,800
Jul.
3 400 @$20. =$
0
00
8,0
00
400 @20.0 =
0
12 @$15. =
0
00
Oct 5
.
Total
18 @20.0 =
0
0
750
$12,75
0
53
0
$
1,800
3,60 220 @$20. =
$
0
00
4,400
$8,350 220
Cost of goods available =

for sale
sold
Cost of goods
Gross profit calculation under FIFO:
Sales (530 units

$40)......................
$21,20
0
Cost of goods sold......
8,35
0
Gross profit................
$12,85
0
8,
000
+
inventory
$4,400
Ending
322

(b) Moving weighted-average perpetual
Inventory Balance
Date
Purchases
Units
Unit
Cost
Sales (at cost)
Total
Cost
Unit
s
Unit
Cost
Cost of
Goods
Sold
(b) (a)
(b)
Tot Averag
al
e
Uni Cost/Un
ts
it
Total
Cost
(a)
Inventory Balance
Calculations
Beginning inventory
Ja
n.
100 @ $1 = $
0
10
00
100
$10.00
$
1,000.00
100
10
90 @ $10.0 =
0
$
900.00
@ $10.0 =
90
0
900.00
10
Ma 14
r.
250 @ $1 = $
5
$14.81
$
3,850.00
14 @ $14.8 =
$
0
1
2,073.40
400 @ $2 = $
0
10
$
100.00
10
$
100.00
3,750
.00
260
$
3,850.0
0
260
$
3,850.0
0
@ $14.8 =
140
1
2,073.4
0
120
30
$
100.00
250 @ $15.0 =
0
260
Jul
y
$10.00
3,7
50
15
$
1,000.0
0
$14.81
$
1,776.60
8,0
00
120
$
1,776.6
0
120
$
1,776.6
0
40 @ $20.0 =
0
0
520
$18.80
$
9,776.60
8,000
.00
520
$
9,776.6
0
520
$
9,776.6
0
323
Oc
t.
30 @ $18.8 =
$
0
0
5,640.00
@ $18.8 =
300
0
5,640.0
0
220
Total
750
$12,750 53
0
Cost of goods
available for sale
=
sold
$18.80
$8,613.4 220
0
Cost of goods
+
inventory
$
4,136.60
$ 4,136.
60
Ending
Gross profit calculation under Weighted-average:
Sales (530 units

$40).....................
$21,200.
00
8,613.4
0
$12,586.
60
220
$
4,136.6
0
324

(c) LIFO perpetual
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Total
Cost
Sales (at
cost)
Uni
ts
Unit
Cost
Inventory
Balance
Cost of
Goods Unit
Sold
s
Total
Cost
100 @$10. =
$
00
1,000
1
0
Ma
r.
Unit
Cost
100 @$10. =
$
00
1,000
90 @$10. =
00
1 250 @$15. =
$
4
00
3,750
1
5
14 @$15. =
0 00
$
900
10 @$10. =
00
$
100
10 @$10. =
00
$
100
250 @15.0 =
0
3,7
50
10 @$10. =
00
$
100
$ 110 @15.0 =
2,100
0
1,
650
10 @$10. =
00
$
100
110 @15.0 = 1,650

0
Jul.
3 400 @$20. =
$
0
00
8,000
400 @20.0 =
0
8,
000
10 @$10. =
00
$
100
110 @15.0 = 1,650

0
Oct 5
.
30 @$20. =
0
00
$ 100 @20.0 =
6,000
0
2,
000
325
Total
750
$12,7
50

for sale
=
53
0
$9,000 220
Cost of goods sold
+
Gross profit calculation under LIFO:

$40).....................
9,000
$12,200
$3,750
Ending inventory
326

Specific identification
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Total
Cost
Sales (at
cost)
Uni
ts
Unit
Cost
Inventory
Balance
Cost of
Goods Unit
Sold
s
Total
Cost
100 @$10. =
$
00
1,000
1
0
Ma
r.
Unit
Cost
100 @$10. =
$
00
1,000
90 @$10. =
00
$
900
1 250 @$15. =
$
4
00
3,750
1 @$10. =
0
00
1
5
13 @15.0 =
0
0
10 @$10. =
00
$
100
10 @$10. =
00
$
100
250 @15.0 =
0
3,
750
$
100
120 @$15. =
$
1,950
00
1,800
120 @$15. =
$
00
1,800
Jul.
3 400 @$20. =
$
0
00
8,000
60 @$15. =
00
Oct 5
.
Total
24 @20.0 =
0
0
750
$12,7
50

for sale
=
53
0
400 @20.0 =
0
8,
000
60 @$15. =
00
$
900
4,80 160 @20.0 =

0
0
3,
200
$
900
$8,650 220
Cost of goods sold
$4,100
Ending inventory
327
Gross profit calculation under Specific Identification:

$40).....................
8,650
$12,550
328

1.
Jan. 1
120 units
Mar. 7
July 28
Oct. 3
250 units
500 units
450 units
@
@
@
Totals
1,320 units
$6.0
0
5.60
5.00
4.60
$720
=
=
=
1,400
2,500
2,07
0
$6,69
0
available for
cost of goods
sale
available for sale
2.
Units sold:
Units remaining in ending inventory:
Jan. 10
Mar. 15
Oct. 5
Totals
1,320 units available for sale less 795 units sold

= 525 units remaining in ending inventory.
70 units
125 units
600 units
795 units
3.(a) Moving weighted-average perpetual

Inventory Balance
Date
Purchases
Uni
ts
Uni
t
Cos
t
Total
Cost
Sales (at cost)
Unit
Units Cost
Cost of
Goods
Sold
(a)
(b)
(a)
Tot Avera
al
ge
Uni Cost/
ts
Unit
(b)
Total
Cost
Inventory Balance
Calculations
Beginning inventory
Jan.
120 @ $6. =
$
00
720.00
120 $6.00
$
720.00
120
10
70 @ $6. =
$
00
420.00
$
720.00
@ $6. =
70
00
420.00
50 $6.00
$
300.00
50
$
300.00
329
50
Mar
.
250 @ $5. =
$
60
1,400.0
0
25 @ 5.6 = 1,400.
0
0
00
300 $5.67
15
$
1,700.0
0
125 @ $5. =
$
67
708.75
500 @ $5. =
$
00
2,500.0
0
$
3,491.2
5
450 @ $4. =
$
60
2,070.0
0
600 @ $4. =
$
94
2,964.00
1,32
0
$6,690. 795
00
Cost of goods available for

sale
=
$1,700.
00
175
$
991.25
175
$
991.25
675
$3,491.
25
675
$3,491.
25
1,1
25
$5,561.
25
1,1
25
$5,561.
25
@ 4.9 =
600
6 2,964.0
0
525 $4.95
$
* 2,597.2
5
Total
300
45 @ 4.6 = 2,070.
0
0
00
1,1 $4.94
$
25
5,561.2
5
$1,700.
00
500 @ 5.0 = 2,500.

0
00
675 $5.17
Oct
.
300
@ 5.6 =708.75
125
7
175 $5.66
$
* 991.25
July 28
$
300.00
$4,092.7 525
5
$2,597.
25
Cost of goods sold Ending inventory

+
525
$2,597.
25
330
*cost/unit changed due to rounding
331

3.(b) FIFO perpetual
Date
Purchases
Uni
ts
Unit
Cost
Sales (at
cost)
Total
Cost
Unit
s
Uni
t
Cos
t
Inventory
Balance
Cost
of
Goods Unit
Sold
s
Unit
Cost
Total
Cost
Jan. 1 Beginning inventory

120 @ $6. =
00
$
720
1
0
Ma
r.
7 250 @ $5. =
60
70 @
2 500 @ $5. =
8
00
$
420
$
1,400
1
5
Jul.
$6. =
00
120 @ $6.0 =
0
$
720
50 @ $6.0 =
0
$
300
50 @ $6.0 =
0
$
300
25 @ 5.60 =
0
1,4
00
50 @
$6. =
00
$
300
7@
5
5.6 =
0
175 @ $5.6 =
420
0
$
980
175 @ $5.6 =
0
$
980
50 @ 5.00 =
0
2,5
00
175 @ $5.6 =
0
$
980
$
2,500
500 @ 5.00 = 2,500

Oct
.
3 450 @ $4. =
60
$
2,070
45 @ 4.60 =
0
2,0
70
17 @
5
$5. =
60
$
980
75 @ $5.0 =
0
$
375
42 @
5.0 =
2,1
45 @ 4.60 =
2,0
332
5
Total
1,32
0
$6,690 79
5

for sale =
25
70
$4,24 525
5
$2,44
5
Cost of goods sold

+
Ending inventory
333

3.(c) LIFO perpetual
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Sales (at
cost)
Total
Cost
Cost of
Goods Unit
Sold
s
$
720
1
0
7 250 @ $5. =
60
70 @$6.0 =
0
2 500 @ $5. =
8
00
$
420
$
1,400
1
5
Jul.
Unit
Cost
Unit
Cost
Total
Cost
120 @ $6. =
00
Ma
r.
Uni
ts
Inventory
Balance
$
720
50 @$6.0 =
0
$
300
50 @$6.0 =
0
$
300
25 @5.60 =
0
1,400
12 @$5.6 =
5
0
$
2,500
120 @$6.0 =
0
$
700
50 @$6.0 =
0
$
300
12 @5.60 =
5
70
0
50 @$6.0 =
0
$
300
125 @5.60 =
700
50 @5.00 =
0
2,50
0
50 @$6.0 =
0
$
300
125 @5.60 =
700
500 @5.00 = 2,500

Oct 3 450 @ $4. =
.
60
$
2,070
45 @4.60 =
0
2,07
0
334
5
Total
1,32
0
$6,690

for sale
=
50 @$6.0 =
0
$
300
45 @$4.6 =
0
0
$ 125 @5.60 =
2,070
700
15 @5.00 =
0
75 350 @5.00 =
0
1,75
0
79
5
$3,940 525
Cost of goods sold
+
$2,750
Ending inventory
335

Specific identification perpetual
Date
Purchases
Uni
ts
Jan
.
Unit
Cost
Sales (at
cost)
Total
Cost
Cost of
Goods Unit
Sold
s
$
720
1
0
70 @$6.0 = $
0
420
7 250 @ $5.6 =
$
0
1,400
1
5
Jul.
Unit
Cost
Unit
Cost
Total
Cost
120 @ $6.0 =
0
Ma
r.
Uni
ts
Inventory
Balance
2 500 @ $5.0 =
$
8
0
2,500
120 @$6.0 =
0
$
720
50 @$6.0 =
0
$
300
50 @$6.0 =
0
$
300
250 @5.60 =
1,4
00
25 @$6.0 = $
0
150
25 @$6.0 =
0
$
150
10 @5.60 =
0
560 150 @5.60 =
8
40
25 @$6.0 =
0
$
150
150 @5.60 =
840
500 @5.00 =
2,5
00
25 @$6.0 =
0
$
150
150 @5.60 =
840
500 @5.00 = 2,500

Oct 3 450 @ $4.6 =
$
.
0
2,070
45 @4.60 =
0
2,0
70
336
5
Total
1,32
0
$6,69
0

for sale =
25 @$6.0 =
0
$
150
150 @5.60 =
840
32 @$5.0 =
0
0
$ 180 @5.00 =
1,600
900
28 @4.60 =
0
1,28 170 @4.60 =

8
7
82
79
5
$4,018 525
Cost of goods sold
+
$2,672
Ending inventory
337

TROUT COMPANY
Income Statement
For year ended December 31, 2011
Moving
Weighted
Average
Specific
Identification
FIFO
LIFO
Sales ......................
$11,925$11,925.00
$11,925.....$11,925
(795 units $15 selling price)
Cost of goods sold....
4,018
4,092.75 4,245
3,940
Gross profit.............. $ 7,907 $ 7,832.25$ 7,680 $ 7,985
Operating expenses.
1,250
1,250.00 1,250
1,250
Net income.............. $ 6,657 $ 6,582.25 $ 6,430 $
6,735
1) The LIFO method results in the highest net income with $6,735.
2) The weighted average net income of $6,582.25 does fall between
FIFO net income ($6,430) and LIFO net income ($6,735).
3) If costs were rising instead of falling then the FIFO method would
probably result in the highest net income.
Exercise 7-6
Purchases/Transport
ation-In/ (Purchase
Returns/Discounts)
Date
Ma
r.
1
2
$2,425.
$97.00
00
(Returns to
Inventory)
Balance in Inventory
Unit Cost/U
Unit Cost/U Total Uni Avg
Total
s nit
Total $ s
nit
$
ts Cost/Unit $
Broug
ht
Forwa
rd
Cost of Goods Sold/
25
$95.00
$4,750
.00
75
95.67
7,175.
00
95.67
1,148.
04 63
95.67
6,026.
96
95.67
(191.
34) 65
95.67
6,218.
30
50
12
(2)
338
7
1
7
48
15
4,592.
95.67
16 17
1,380.0
92.00
0
2
8
32
25
93.94
2,348.
50
95.66
1,626.
14
93.94
3,006.
14
93.95 657.64
Analysis component:
The gross profit ratio for Product W506 for March 2011 is 35.71%
calculated as net March sales of $12,284 (83 units $148) less March
cost of goods sold of $7,897.36 = $4,386.64 gross profit $12,284 = .
3571 100.
339

c. LCM applies to inventory as a whole: $14,260
d. LCM applied separately to each product: $13,792
Calculations:
Per
Unit
Inve
ntor
y
Ite
ms
Uni
ts
on
Ha
nd
BB
22
FM
15
MB
36
SL
40
c.
C
N
o
R
s
V
t
$10 $10
0
8
15
14
6
4
19
18
0
2
72
87
Tot
al
Tot
al
Co
st
NR
V
$2,20
0
2,34
0
6,84
0
2,88
0
$14,2
60
$2,37
6
2,16
0
6,55
2
3,48
0
$14,5
68
LCM applied
to:
a.
b.
Inve
Eac
ntory
h
as a
Whol
e
$14,2
60
Pro
du
ct
$2,20
0
2,16
0
6,55
2
2,88
0
$13,
792
2011
Dec. Cost of Goods Sold.............................
31
Merchandise Inventory..............
To write inventory down to market;
14,260 13,792 = 468

1. $900,000 $500,000 = $400,000
468
468
340
2.
For years ended
Income statement information
December 31, 2011,

2012, and 2013
actually reported for

years ended December 31,
income statement
information
should have been
reported as:
Sales
2011
$900,000
2012
$900,0
00
2013
$900,
000
$900,
000
Cost of goods
sold:
Beginning
inventory
Add: Purchases
Less: Ending
inventory
Cost of goods
sold
Gross profit
$200,00
0
$200,
000
$180,
000
$200,
000
500,000
500,0
00
500,0
00
500,0
00
200,00
0
180,
000
200,
000
200,
000
500,000
$400,000
520,0
00
480,
000
500,
000
$380,0
00
$420,
000
$400,
000
341

Inventory, January 1
Purchases
Purchase returns
Transportation-in
Less: Estimated cost of goods sold:
Sales
Estimated cost of goods sold
[$2,000,000 (1 30%)]
....
$ 450,000
$1,590,000
(23,100)
37,600 1,604,500
....
$2,054,500
$2,000,000
....
(1,400,000)
Estimated March 31 inventory

$ 654,500
At Cost
At Retail
Beginning inventory
$63,800.00 $
128,400.00
Net purchases
115,620.00
196,800.00
$179,420.00
$325,200.00
Deduct net sales at retail
260,000.00
Ending inventory at retail
$ 65,200.00
Cost ratio: ($179,420/$325,200) 100 = 55.17%
Ending inventory at cost ($65,200 55.17%)
$35,970.84
a. $54,600 55.17% = $30,122.82
b.
At Cost
Estimated inventory that should have
been on hand ......................
Physical inventory................................
Inventory shrinkage..............................
At Retail
$35,970.84
30,122.82
$ 5,848.02
$65,200.00
54,600.00
$ 10,600.00
342

Ending Cost of
InventoryGoods Sold
a. Weighted-average cost ($6,600/1,320 = $5.00):
$5.00 50 .........................................
250
$6,600 $250 ....................................
6,350
b. FIFO:
50 $4.40 .........................................
$6,600 $220 ....................................
220
6,380
c. LIFO:
50 $6.00 .........................................
$6,600 $300 ....................................
300
6,300
FIFO provides the lowest net income because it has the highest cost
of goods sold due to decreasing unit costs.
Ending Cost of
InventoryGoods Sold
a. FIFO:
(50 $2.86) + (100 $2.50) ............
393
(120 $2.00) + (250 $2.30) + (400 $2.50)
1,815
b. LIFO:
(120 $2.00) + (30 $2.30) ............
309
(50 $2.86) + (500 $2.50) + (220 $2.30)
1,899
c. Weighted-average cost ($2,208/920 = $2.40):
$2.40 150 .......................................
360
$2.40 770 .......................................
1,848
LIFO provides the lowest net income because it has the highest cost
of goods sold due to rising unit costs.
343

Ending inventory:
Units
Cost/Un
it
Total Cost
Beginning inventory
80 @
$2.00 =
$160.00
March 7 purchase
22 @
2.30 =
50.60
July 28 purchase
48 @
2.50 =
120.00
150
$330.60
Cost of goods sold:

Cost of goods available for sale less Ending inventory = Cost of goods
sold
$2,208.00 $330.60 = $1,877.40

Merchandise turnover
2012:
$ 643,825
($96,400 +
$86,750)/2
2011:
$ 426,650
= 7.0 times
= 4.8 times
($86,750 +
$91,500)/2
Days sales in inventory
2012:
$
96,40 365
0
$643,
825
= 54.7 days
344
2011:
86,75 365
0
$426,
650
= 74.2 days
It appears that Russo has lower levels of merchandise inventory

on hand which is generally favourable provided customers are
not being turned away because of out-of-stock items.
Chapter 8
Accounting Information
Systems

EXERCISES

Sales Journal
Date
Account
Debited
Invoice
Number
PR
Accounts
Receivable Dr.
Sales Cr.
Pag
Cost of Goods So
Dr.
Merchandise
Inventory Cr.
2011
Feb. 7
J. Eason
5704
1,150
700
12
P. Lathan
5705
320
170
25
S. Summers
5706
550
300

SALES JOURNAL
Date
Page 2
Account Debited
Invoic
e
Numb
er
A/R Dr.
PR
Sales
Cr.
2011
Fe
b.
7 J. Eason
5704
1,150
641
345
12 P. Lathan
5705
320
25 S. Summers
5706
550

Cash Receipts Journal
Date
Account
Credited
PR
Explanation
Cash
Dr.
Sales
Disco
unt
Dr.
Account
s
Receiva
ble Cr.
Ot
Sale Acc
s Cr.
ts
2011
Sept.9
Notes
payable
Note to bank
5,50
0
5,
13
Dale Trent,
capital
Owner
investment
7,00
0
7,
18
Sales
Cash sale
27
J. Namal
Invoice,
Sept. 7
460
1,76
4
460
36
1,800
346

642

CASH RECEIPTS JOURNAL
Account
Date
Credited
Explanation
PR
Page 2
Sales
Accts.
Other
Cash
Disc.
Rec.
Sales
Accts.
Debit
Debit
Credit
Credit
Credit
2011
Se
pt.
9 Notes
payable
Note to
bank
5,500
5,500
1 Dale Trent,
3 capital
Owner
investment
7,000
7,000
1 Sales
8
Cash sale
2 J. Namal
7
Invoice,
Sept. 7
460
1,764
460
36
1,800
347
Page 1
Purchases Journal
Date
Account Credited
Date
of
Invoic
e
Terms
PR
Accounts
Payable
Cr.
Merchan
dise
Inventor
y Dr.
8,100
Office
Supplies
Dr.
Other
Accounts
Dr.
2011
July
Angler, Inc.
Ju
l
n/30
8,100
14 Store Supplies/ Steck

Company
Ju
l
1
4
2/10,
n/30
240
17
Ju
l
1
7
n/30
2,600
Marten Company
240
2,600

Page 2
PURCHASES JOURNAL
Account
s
Date
of
Date
Account Credited
Invoi
ce
Terms
PR
1 Angler, Inc.
July
n/30
Other
Payable
Purchas
es
Suppli
es
Accoun
ts
Credit
Debit
Debit
Debit
8,100
8,100
2011
July
Office
348
1
14 Store Supplies/Steck
Company
July
14
2/10,n
/30
17 Marten Company
July
17
n/30
240
2,600
240
2,600
349


Cash Disbursements Journal
Date
Ch.
No.
Account
Debited
Payee
PR
Cash
Cr.
Page 1
Merchandi
se
Inventory
Cr.
Other
Accounts
Dr.
Accounts
Payable
Dr.
2011
Mar. 9 210 Narlin Corp.
Store
Supplies
900
900
3,000
17 211 City Bank
Notes
Payable
3,000
29 212 LeBaron
LeBaron
6,860
31 213 E. Brandon
Salaries
Expense
3,400
31 214 Pace, Inc.
Pace, Inc.
5,500
140
7,000
3,400
5,500

CASH DISBURSEMENTS JOURNAL
Ch
.
Date
No Payee
.
Account Debited
PR
Page 2
Purcha
se
Other
Accts.
Cash
Discou
nt
Accts.
Payabl
e
Credit
Credit
Debit
Debit
643
350
2011
Ma
r.
9 21
0
Narlin Corp.
Store Supplies
900
900
1 21
7 1
City Bank
Notes Payable
3,000
3,000
2 21
9 2
LeBaron
LeBaron
6,860
3 21
1 3
E. Brandon
Salaries Expense
3,400
3 21
1 4
Pace, Inc.
Pace, Inc.
5,500
140
7,000
3,400
5,500

644
351

Part 1 Wilson Purchasing
Page 1
Purchases Journal
Date
Account Credited
Date
of
Invoice
Terms
PR
Accounts
Payable
Cr.
Merchan
dise
Inventor
y Dr.
30,000
30,000
Office
Supplies
Dr.
Other
Accounts
Dr.
2011
May
11
Hostel Sales
Ma
y
1
1
3/10,
n/90
Date
Ch.
No.
Account
Debited
Payee
PR
Cash
Cr.
Page 1
Merchandi
se
Inventory
Cr.
Other
Accounts
Dr.
Accounts
Payable
Dr.
2011
May
11
84
Express
Shipping
Merchandise
Inv.
335
20
85
Hostel Sales
Hostel Sales
27,9361
General Journal
335
864
Page: 1
28,800
352
Date
PR
Debit
Credi
t
2011
May
1 Accounts Payable Hostel Sales

2
1,20
0
1,20
0
Calculations:
1. 30,000 1,200 = 28,800; 28,800 x 3% = 864; 28,800 864 = 27,936.
353


Part 2 Hostel Sales
Sales Journal
Date
Account
Debited
Invoice
Number
PR
Page 1
Accounts
Receivable Dr.
Sales Cr.
Cost of Goods Sold

Dr.
Merchandise
Inventory Cr.
30,000
20,000
2011
May
11
Wilson
Purchasing
1601
Page 1
Cost of
Goods
Sold Dr.
Date
Account
Credited
P
R
Explanation
Cash
Dr.
Sales
Disco
unt
Dr.
Account
s
Receiva
ble Cr.
864
28,800
2011
May
21
Wilson
Purchasing
Wilson
Purchasing
General Journal
27,9
361
Page: 1
Other
Sale Accoun
s Cr.
ts Cr.
Merchandi
se
Inventory
Cr.
645
354
Date
PR
Debit
Credi
t
2011
May
1 Sales Returns and Allowances. . .

2
1,20
0

Purchasing.......................................
1,20
0
To record sales return.
1 Merchandise Inventory......................
2
Cost of Goods Sold.......................
800
800
To record cost of merchandise

returned to inventory.
Calculations:
1. 30,000 1,200 = 28,800; 28,800 x 3% = 864; 28,800 864 = 27,936.
355

646
May
May

Part 1 Wilson Purchasing
PURCHASES JOURNAL
Page 2
Account
s
Date of
Date
Account Credited
Invoice
Terms
PR
Office
Other
Payable
Purchas
es
Suppli
e
s
Accou
n
t
s
Credit
Debit
Debit
Debit
30,000
30,000
2011
11 Hostel Sales
May 11
3/10,n
/
9
0
Date
Payee
Account Debited
PR
Purcha
s
e
Other
Accts.
Cash
Discou
n
t
Accts.
Payabl
e
Credit
Credit
Debit
Debit
2011
11
Express
Shippi
Transportation-In
Page 2
335
335
356
ng
20
Hostel Sales
A/P Hostel Sales
27,93
6
General Journal
Date
864
Page: 1
PR
Debit
Credi
t
2011
May 12 Accounts Payable Hostel Sales
Purchase Returns and Allowances .
To record return of merchandise
purchased.
1,20
0
1,20
0
28,80
0
357


Part 2 Hostel Sales
SALES JOURNAL
Page 2
Invoic
e
Date
Account Debited
Numb
er
A/R Dr.
PR
Sales
Cr.
2011
Ma
y
11 Wilson Purchasing
1601
30,00
0
Sales
Accts.
Cash
Disc.
Rec.
Sales
Accts.
Debit
Debit
Credit
Credit
Credit
27,93
6
864
28,80
0
Account
Date
Credited
Explanation
2 Wilson
1 Purchasing
Sale of May
11
PR
2011
Ma
y
General Journal
Date
2011
Page 2
Page: 1
PR
Debit
Credi
t
Other
647
358
May
1 Sales Returns and Allowances. . .

2
Purchasing.......................................
To record sales return.
1,20
0
1,20
0
359

The June 5 purchase would have been recorded in the Purchases
Journal and the June 14 payment would have been recorded in the
Cash Disbursements Journal. The error in journalizing the June 14
transaction should be discovered in the process of crossfooting the
Cash Disbursements Journal at the end of the month.
a. When the schedule of accounts payable is prepared.
b. When crossfooting the Purchases Journal.
c. When the trial balance is prepared.
d. When the schedule of accounts payable is prepared.
e. When the schedule of accounts payable is prepared.

359
360

Part 1
ACCOUNTS RECEIVABLE SUBLEDGER
Sanders Farrell
Don Holland
Brad Smithers
May 17
May 20 500 May 10
1,700
3,880
25 680
Bal.
May 6
5,760
Bal.
4,560
1,200
Part 2
GENERAL LEDGER
Accounts Receivable
May 31
May 20500
12,020
Sales Returns
and Allowances
Sales
May 31
May 20
12,020
500
Bal. 11,520
Part 3
VALUE-MART GOODS
Schedule of Accounts Receivable
May 31, 2011
Sanders Farrell...........................
1,200
Dan Holland....................................................
4,560
Brad Smithers............................
5,760
Total accounts receivable...........
$11,520
Accounts Receivable Controlling Account
Total debit.................................
$12,020
360
361
Credit for return.........................

Balance as of May 31, 2011.........

(500)
$11,520
361
362
GENERAL LEDGER
Cash
38,878
Accounts Payable
23,044
1,500
Sales Discounts
23,200
472
18,300
Accounts Receivable
26,200
Notes Payable
600
Purchases
9,000
23,200
23,600
Prepaid Insurance
Purchase Returns
and Allowance
Sales
1,700
26,200
1,500
5,750
Store Equipment
3,500
1,000
Sales Returns
and Allowances
Purchase Discounts
600
456

Jack Hertz
7,400
Trudy Stone
600
16,800
16,800
Dave Waylon
2,000
6,800
ACCOUNTS PAYABLE SUBLEDGER

Grass Corp.
1,500
10,800
McGrew Company
3,400

Sulter, Inc.
9,000
9,000
362
363
9,300

363
364

Part 1
Adrian Carr
Jan.
7,076
Lisa Mack
Jan. 1
4
Jay Newton
Jan.
4,176
2
8,468
23,78
0
Kathy Olivias
Jan. 1
0
15,54
4
20
12,99
2
29
Part 2
Jan. 31
Sales.........................................
GST Payable..............................
PST Payable...............................
72,036
62,100
3,726
6,210
Part 3
GENERAL LEDGER
Accounts Receivable
Jan.
31
Sales
72,03
6
62,10 Jan. 3
0
1
Part 4
SKILLERN COMPANY
Schedule of Accounts Receivable
January 31, 2011
Adrian Carr ....................

Lisa Mack .............................

$ 7,076
23,780
364
365
Jay Newton ..........................
12,644
Kathy Olivas ........................
28,536
Total accounts receivable......
$72,036

365

652
366
Sales Journal
Date
Account Debited
Invoice
No.
PR
A/R Dr
Page X
PST
Payable
CR
GST
Payable
CR
Sales Cr
COGS DR
Merchandi
se
Inventory
CR
2011
Aug.
11
Jay Smith
50
50,160
3,520
2,640
44,000
21,000
Dee Oliver
51
38,760
2,720
2,040
34,000
16,200
Date
Account
Credited
Explanat
ion
PR
Other
Accou
nts CR
A/R
PST
Paya
ble
CR
Page X
GST
Paya
ble
CR
Sal
es
CR
Sale
s
Disc
Dr
Cash
DR
2011
Aug. Jay Smith
20
21 Dee Oliver
Inv. 50
50,1
60
50,160
Inv. 51
38,7
60
38,420
Purchases Journal
Merchandi
se
Inventory
Other
Accounts
340*
Page X
GST
Recble
COGS/DR
Merchandi
se
Inventory/
CR
367
Date
Account Credited
2011
Aug.
Arden Sheet
Metal
Terms
PR
A/P CR
2/10,
n/30
10,600
n/
30
6,360
JayCee
Equipment
DR
DR
10,000
DR
600
6,000
360
Date
Ch #
Account Debited
PR
Other
Accounts
DR
GST
Recble
DR
Page X
A/P DR
Merchand
ise
Inventory
CR
Cash CR
2011
Aug.
28
A/P Arden Sheet

Metal
*Discount on sales amount only
10,600
200
10,400
368

SALES JOURNAL
Page X
Date
201
1
Aug.
Invoice
Number
Account Debited
5 Jay Smith
11 Dee Oliver
PR
Accts.
Rec.
Debit
50
51
PST
Payable
Credit
50,160
38,760
GST
Payable
Credit
3,520
2,720
2,640
2,040

Page X
Date
Account
Credited
2011
Aug.2 A/R Jay
0 Smith
21 A/R Dee
Oliver
Date
2011
Aug.
Explanation
PR
Other
Accts.
Credit
Accts.
Rec.
Credit
Inv. 50
50,160
Inv. 51
38,760
Date of
Invoice
Account Credited
1 Arden Sheet Metal
7 JayCee Equipment
Terms
PST
Payable
Credit
GST
Payable
Credit
Sales
Credit
PURCHASES JOURNAL
Page X
Accts.
Payable Purchases
PR
Credit
Debit
Aug. 1 2/10,n/30
Aug. 7
n/30
10,600
6,360
10,000
653

Page X
Ch.
Date
No.
Payee
Account Debited
PR
Other
GST
Accts.
Accts.
Recble
Payable
Debit
Debit
Debit
2011
Aug.1 28
0
A/P Arden
Arden Sheet
Metal
10,600
Current/O

368
369
edition
CAMOSUN COLLEGE
Chapter 9
EXERCISES
73050199
BAYE
MP MGRL ECON/BUS STRAT

W/DD
70877386
BUCKWO
LD
CDN INCOME TAX/8CE
Internal Control and Cash

Lombard Companys internal control system failed to require a
separation of asset custody and recordkeeping. The bookkeeper
should not have been allowed to sign the companys cheques. In
addition, since a loss was incurred, the company apparently had not
bonded its employee. Otherwise, the loss would have been insured
by the bonding company. Finally, if regular, independent reviews of
the accounting records had been done, the payments of salary
cheques to a nonemployee may have been discovered sooner.
You have several concerns. First, there is no mechanism in the
parking meters to track the input of coins (a meter reading that could
be documented and subsequently verified against the collection); this
means there is no verifiable means by which to reconcile the
contents of each meter. Second, because of the first shortcoming,
the employee emptying the contents of the meters could withhold
some of the coins since the dollar value cannot be verified. Third, the
canvas bag is not secure; it can be opened at any time by an
unauthorized individual. Fourth, after emptying several parking
meters, the contents of each canvas bag can easily exceed a
thousand dollars; there is a safety risk to a lone employee carrying a
canvas bag of money.
To correct the situation, optimally, the parking meters should be
mechanized such that the contents can be reconciled. However, a
major investment in new parking meters seems unlikely, therefore,
civic employees collecting coins from parking meters should operate
in pairs; there is less risk of fraud if two employees are responsible
for emptying the parking meters (unless there is collusion). The
369
370
canvas bag used to collect the coins is also problematic. It should be

redesigned so that coins can go in but cannot be removed unless
done so by an authorized individual. Finally, for safety of the
individuals involved and for security over the coins, full moneybags
should not be stored in an unattended vehicle. Full moneybags
should be transferred to a secure location immediately;
arrangements could be made with an armored vehicle to rendezvous
with the pair of employees regularly at specified points along the
route.

370
371

a. If a cash register cannot be used, the total sales value of the
shirts and sunglasses given to the employee each day should be
calculated. Then, the employee should sign a receipt for the
merchandise and the amount of cash that he or she has been
given. At the end of each day, the employee should be required to
return cash plus remaining shirts and sunglasses equal to the
amount taken to the stand.
b. The employee should sign a receipt for the total amount of cash
he or she is given each weekend. Then, each time the employee
makes a purchase, he or she should obtain a signed sales receipt
for the payment. The sales receipt should list the items purchased
and the prices paid. When the employee returns to the business
office, the total value of the signed sales receipts plus any
remaining cash should equal the amount of cash originally given
to the employee. Also, the merchandise brought back by the
employee should be the same as the items listed on the signed
sales receipts.
The internal control problem is that the bookkeeper has physical
control over the cash receipts and also has control over the
accounting records. Nothing in the system prevents the bookkeeper
from taking cash from the mail and using it personally. The
bookkeeper might delay recording the cash receipt from a customer
until more cash comes in at a later date from a second customer.
Then, the new cash receipt would be deposited and recorded as a
payment made by the first customer. No entry would be made in the
second customers account until cash was received from a third
customer. (This type of fraud is called lapping.) Also, the
bookkeeper may pocket cash and claim that a payment was never
received and apparently lost in the mail.
If only one person is present when the mail is opened, that person
may steal cash and claim it was never received. If possible, two
people should be present. Otherwise, the honesty and integrity of the
person chosen to open the mail is critical. Most importantly, the
bookkeeper should not have physical control over cash.

371
372

Part 1
a.
Jan. 1
b.
Petty Cash........................................... 200.00

Cash..............................................
To establish the fund.
200.00
Eanes Co.
Petty Cash Payments Report
January 1 8, 2011
Receipts:
Postage expense.............................
$64.0
0
Merchandise inventory....................
19.00
Store supplies.................................
36.50
Jim Eanes, Withdrawals...................
53.0
0
Total receipts.......................................
$172.50
Fund total....................................
$200.
00
Less: Cash remaining..................
27.5
0
Equals: Cash required to replenish

petty cash............................................
172.5
0
Cash over/(short).................................
$
-0-
Jan. 8
Part 2
Jan. 8
Postage Expense.................................
Merchandise Inventory........................
Store Supplies Expense*.....................
Jim Eanes, Withdrawals.......................
Cash..............................................
To reimburse the fund.
64.00
19.00
36.50
53.00
Postage Expense.................................
64.00

172.50
372
373
Merchandise Inventory........................ 19.00

Store Supplies Expense*..................... 36.50
Jim Eanes, Withdrawals....................... 53.00
Petty Cash........................................... 300.00
Cash..............................................
472.50
To reimburse the fund and increase it by $300.
Analysis Component
If the January 8 entry to reimburse the fund was not recorded, net
income would be overstated.
* Either Store Supplies Expense (an expense) or Store Supplies (an
asset) could be debited. However, if supplies are being purchased
through Petty Cash it is likely that they are for immediate use which
justifies using an expense account over an asset.

373
374

a.
Sept. 9
b.
Petty Cash........................................... 400.00

Cash..............................................
To establish the fund.
400.00
Brady Company
Petty Cash Payments Report
September 9 30, 2011
Receipts:
Merchandise inventory.............
$
32.45
Office supplies.................................
113.5
5
Repairs expense..............................
87.6
0
Total receipts...............................
$233.60
)
Fund total....................................
$400.
00
Less: Cash remaining...................
146.4
0
Equals: Cash required to replenish petty

cash.....................................................
253.6
0)
Cash over/(short)..................................
($
20.00)
Sept.30
Merchandise Inventory........................ 32.45

Office Supplies Expense*.................... 113.55
Repairs Expense.................................. 87.60
Cash Over and Short........................... 20.00
Petty Cash.....................................
100.00
Cash..............................................
153.60
To reimburse the fund and decrease it by $100.

374
375
Analysis component:
There are several things that could be done. The Marketing Manager
should review the prior months petty cash journal entries to determine
if the shortage is an anomaly or a recurring event. Hopefully it is an
anomaly but, regardless, the manager will need to question the Petty
Cash Custodian about the $20 cash shortage recorded in September. It
is important to recognize that honest errors do occur. It is also possible
that the Petty Cash Custodian requires training to help him manage the
petty cash fund. If it is determined that the error was based on
dishonesty, appropriate action will have to be taken (which normally
results in the dismissal of the employee as a minimum).
* Either Office Supplies Expense (an expense) or Office Supplies (an


375
376

a.
Oct. 31................................Cleaning Expense
Postage Expense..................................
Delivery Expense..................................
Cash Over and Short...................
Cash...........................................
79.00
60.00
b.
Nov. 30...................Computer Repair Expense
Entertainment Expense........................
Cash Over and Short.............................
Cash............................................
156.00
2.00
c.
Dec. 31.......................................Gas Expense
Office Supplies Expense*......................
Entertainment Expense........................
Petty Cash............................................
Cash............................................
To reimburse and increase the fund.
140.00
62.00
100.00
120.00
4.00
255.00
75.00
233.00
80.00
382.00
* Either Office Supplies Expense (an expense) or Office Supplies (an


376
377

Oct. 1
Cash....................................................
104,475
Debit Card Expense.............................
525
Service Revenue............................
105,000
To record sale of services less debit card
expense; 0.5% x 105,000 = 525.
Cash....................................................
37,000
Service Revenue............................
37,000
To record sale of services provided for cash.
Cash....................................................
59,780
Credit Card Expense............................
1,220
Service Revenue............................
61,000
To record sale of services less credit card
expense; 2% x 61,000 = 1,220.
10
Accounts Receivable Edson CHC.......

Service Revenue............................
To record sale of services.
25
Cash....................................................
80,320
Sales Discounts...................................
3,680
Accounts Receivable Edson CHC.
84,000
To record collection of Oct. 10 credit sale;
2% x 84,000 = 3,680.

84,000
84,000
377
378

Jan. 15
Cash....................................................
56,000
Sales..............................................
56,000
To record sale of merchandise to cash customers.
15
Cost of Goods Sold..............................

Merchandise Inventory...................
17
Accounts Receivable...........................
15,800
Sales..............................................
15,800
To record sale of merchandise on terms 2/10, n30.
17

20
Cash....................................................
111,720
Credit Card Expense............................
2,280
Sales..............................................
114,000
To record sale of merchandise less credit card
expense; 114,000 x 2% = 2,280.
20

25
Cash....................................................
71,640
Debit Card Expense.............................
360
Sales..............................................
72,000
To record sale of merchandise less debit card
expense; 0.5% x 72,000 = 360.
25


36,400
12,000
74,100
46,800
36,400
12,000
74,100
46,800
378
379

Analysis component
Cash sales would be preferable, however, often it is not convenient
for customers. The inconvenience of cash might prevent customers
from making purchases if that was the only means of payment
accepted by LenCon. Credit sales allow customers to purchase on
impulse. However, two disadvantages: receipt of cash by LenCon is
delayed and credit sales require administrative time to monitor the
timely collection from credit customers. Debit cards have the
advantage of allowing customers to make impulse purchases but
only if the cash balance is available in their bank account. Debit
cards are also comparable to cash (no subsequent collection
required) but the bank does charge a fee for this service although it
is normally significantly less than the fee charged by banks for
credit card transactions. Bank credit cards have the advantages of
cash being collected by LenCon immediately (positive effect on cash
flow) and customers are limited only to their credit card limit (not
their bank account balance); customers are buying on credit but the
risk of collection is transferred to the credit card company. The
disadvantage of credit cards is the fee charged by the
administering bank. LenCon will likely accept all forms of payment
to enhance sales and in so doing recognize the costs and risks of
each.

379
380

1.
PELZER HOLDINGS
Bank Reconciliation
July 31, 2011
Bank statement balance....
$9,84
8
Book balance...........
$9,74
0
Add:
Outstanding deposit.......
Bank error (Peltza
cheque)............................
572
56
0
$10,9
80
Deduct:
Deduct:
Outstanding cheques:
#14: $
600
#54:
140..............
1,48
0
Adjusted bank balance......
$9,50
0
2.
July
31
NSF Jim
Anderson.................
240
Adjusted
book
balance....................
$9,50
0
Accounts Receivable Jim Anderson

Cash..........................................
240
240
To reinstate customer account.
Analysis component
If the journal entry in (2) is not recorded, net income, liabilities, and
owners equity would not be affected. Assets would be increased and
380
381
decreased by the same amount causing a net change of zero.

MEDLINE SERVICE CO.
Bank Reconciliation
July 31, 2011
Bank statement balance ...............
$10,332
Add:...............................
Deposit of July 31......
Book balance of cash.................
2,724
Error on Ch. No. 919
$13,056
Deduct:..........................
Outstanding cheques.
$11,352
Add:
9
$11,361
Deduct:
1,713
Adjusted bank balance....$11,343
Bank service charge
18
Adjusted book balance. $11,343

b.
July 31
Cash....................................................
Utilities Expense............................
To correct error.
31
Bank Service Charges Expense...........

Cash..............................................
To record bank service charges.
18
18
Analysis component
If the journal entries in part (a) were not recorded, net income,
assets, and owners equity would each be overstated by a net
amount of $9 ($18 - $9 = $9); liabilities are not affected by the
entries in (a).

381
382

Not Shown
Book Balance
on the
Must ReconcilAdd Deduct Add DeductAdjust iation
1. Interest earned on the account.
x
Dr.
Bank Balance
2. Deposit made on September 30

after the bank was closed. x
3. Cheques outstanding on August
31 that cleared the bank in
September.
4. NSF cheque from customer
returned on September 15 but
not recorded by the company.
Cr.
5. Cheques written and mailed to

payees on September 30.
6. Deposit made on September 5
that was processed on

September 8.
7. Bank service charge.
8. Cheques written and mailed to
Cr.
payees on October 5.
9. Cheque written by another
depositor but charged against
the company's account.

x
10. Principal and interest
collected by the bank but not
recorded by the company.
11. Special charge for collection
of note in No. 10 on company's
behalf.
12. Cheque written against the
Dr.

Cr.
382
383
account and cleared by the

bank; erroneously omitted by
the bookkeeper.

Cr.
383
384

Case X
Cash..................................
800
Short-term investments......
-0-
Accounts receivable............
-0-
Quick assets.......................
Current liabilities................
$2,200
Acid-test ratio....................
800
0.36
Case Y
$
910
-0-
Case Z
$1,100
500
990
800
$1,900
$2,400
$1,100
$3,650
1.73
0.66
Case Y exhibits the superior ability to meet short-term obligations as

they come due. The acid-test ratio of 1.73 exceeds the common
benchmark of 1.0. Cases X and Z fall short of the 1.0 benchmark.
Chapter 10
aaExercises
Receivables

Apr. 6
Cash........................................ 8,832.00
Credit Card Expense ($9,200 .04)
368.00
Sales...................................
9,200.00
COGS....................................... 5,300.00
5,300.00
10
Accounts ReceivableColonial. .
Sales...................................
310.00
10
COGS.......................................
160.00
17
No entry required.

310.00
160.00
384
385
28
5,480.00
Cash........................................ 5,370.40
Credit Card Expense ($5,480 .02)
Accounts ReceivableColonial

109.60
385
386

1.
GENERAL LEDGER
Accounts
Receivable
Nov. 3 8,834
Bal.
Sales Returns
and Allowances
Sales
Nov. 378
19
Nov. 8,834
3
8 2,500
8 2,500
11 1,466
11 1,466
28 5,212
28 5,212
17,63
4
18,01
2
Nov.
19
378
ABC Shop
Nov. 38,834
Colt Enterprises
Nov. 8 2,500
285,212
Bal.
Red McKenzie
Nov.
11
1,466
Bal.
1,088
Nov.
19
378
14,04
6
2. Subledger proof:
ABC Shop..................................... $14,046
Colt Enterprises............................
2,500
Red McKenzie...............................
1,088
Balance of the Accounts Receivable account
$17,634
a.Oct. 31Allowance for Doubtful Accounts
1,000
386
387
1,000
Accounts ReceivableGwen Rowe
b.Dec. 9 Accounts ReceivableGwen Rowe

Allowance for Doubtful Accounts
200
9
200
200
Cash........................................
200
Accounts ReceivableGwen Rowe

387
388

Dec. 31 Bad Debt Expense....................
8,750
8,750
Expense = .005 $1,750,000 = $8,750.
Feb. 1

Accounts ReceivableCatherine Hicks
1,800
1,800
June 5

1,800
1,800
5
Cash........................................
1,800
1,800

a.Dec. 31 Bad Debt Expense..................
3,615
3,615
Accounts Receivable
Allowance for
Doubtful Accounts
2,7
Unadjusted
balance
45
?
= 3,615
Adjustment
Bal.
159,000
4%
$ 6,360
6,3
60
Required
Adjusted
Balance
b.Dec. 31 Bad Debt Expense.................. 10,356

10,356
Accounts Receivable
Allowance for
Doubtful Accounts
Unadjus
ted
balance
3,9
96
?
= 10,356
Adjustment
Bal.
6,3

Required
388
389
159,000
4%
$ 6,360
60

Balance
389
390

a) $345,000
b)
c)
d)
e)
$356,000
$2,900
$170
$2,550

LISTEL
Partial Balance Sheet
March 31, 2011

Assets
Current assets:
Cash........................................................
$
29,000
Accounts receivable................................
$102,00
0
Less: Allowance for doubtful accounts
2,100
99,900
Notes receivable, due November 30, 2011
17,000
Merchandise inventory...........................
65,000
Supplies..................................................
4,500
Total current assets................................
$215,40
0
Note:Bad Debt Expense is an income statement account and is therefore

not listed on the balance sheet. Notes Receivable due May 1, 2013,
Building and Accumulated Amortization, Building are asset accounts
shown on the balance sheet but they are not current assets.

390
391

a.
2011
Dec. Bad Debt Expense..........................
31
7,314
Allowance for Doubtful Accounts.................
7,314
To record estimate for uncollectible accounts;

492,500 4,900 = 487,600 x 1.5% = 7,314.
b.
2012
620,000
Sales...........................................................
620,000
To record credit sales during 2012.
Cost of Goods Sold............................................
406,500
Merchandise Inventory...............................
406,500
To record cost of sales during 2012.
Cash...................................................................
491,300
Sales Discounts.................................................
6,200
497,500
To record collections less sales discounts.
Allowance for Doubtful Accounts....

12,450
12,450
To record the write-off of uncollectible

391
392
accounts.
c.
2012
Dec. Bad Debt Expense..........................

31
Allowance for Doubtful Accounts..................
9,207
9,207

620,000 6,200 = 613,800 x 1.5% = 9,207.

392
393

d.
Assets
Current assets:
Accounts receivable1................................................
$180,05
0
Less: Allowance for doubtful accounts2...................
4,97
1
$175,07
9
OR
$175,07
9
Accounts receivable (net).............................................
Calculations:
1.
Accounts Receivable
Bal. Dec
31/11
70,000
620,00
2012 sales
0
2.
2012
collection
497,5 s
00
900
Adjustment
2012
write-offs
7,31
4
12,45
0
Bal. Dec
31/12
180,05
0
Unadj.Bal.
Dec 31/11
2012
writeoffs
Dec 31/11
8,21 Adj. Bal. Dec

4 31/11
12,4
50
Adjustment
Dec 31/12
9,20
7

393
394
4,97 Adj. Bal. Dec

1 31/12
Analysis component:
The main advantage of the income statement approach is

its simplicity. Like the balance sheet approach, it satisfies
the generally accepted accounting principles of matching
and conservatism. The main disadvantage is that it does
not compensate for over or under estimations from year
to year because it is not focused on the element that is
uncollectible, namely, the accounts receivable.

394
395

a.
2011
Dec. Bad Debt Expense...............................
31
500
Allowance for Doubtful Accounts..............
500
To record estimate for uncollectible

accounts;
70,000 x 2% = 1,400; 1,400 900 = 500.
b.
2012
Accounts Receivable....................
620,000
Sales........................................................
620,000
To record credit sales during 2012.
Cost of Goods Sold.......................
406,500
Merchandise Inventory............................
406,500
To record cost of sales during 2012.
Cash............................................
491,300
Sales Discounts..............................................
6,200
Accounts Receivable..............
497,500
To record collections less sales discounts.
Allowance for Doubtful Accounts. .

Accounts Receivable...............................

12,450
12,450
395
396
To record the write-off of uncollectible

accounts.
c.
2012
Dec. Bad Debt Expense........................
31
Allowance for Doubtful Accounts..............
14,651
14,651
To record estimate for uncollectible

accounts;
180,050 x 2% = 3,601;
3,601 1,400 + 12,450 = 14,651.

396
397

d.
Assets
Current assets:
Accounts receivable........................
$180,050
Less: Allowance for doubtful accounts.................
3,601
$176,449
OR
$176,449
Accounts receivable (net)..........................................
Calculations:
Accounts Receivable
Bal. Dec
31/11
70,000
620,00
2012
0
500 sales
Bal. Dec
31/12
2012
collectio
497,5 ns
00
900
2012
write12,45 offs
0
Adjustment
Dec 31/11
180,05
0
14,65
1
Unadj. Bal.
Dec 31/11
1,400
2012
writeoffs
12,4
50
Adj. Bal.
Dec 31/11
Adjustment
Dec 31/12
3,601
Adj. Bal.
Dec 31/12
Analysis component
397
398
The main advantage of the balance sheet approach is that

it adjusts the allowance for doubtful accounts to the
estimated amount of uncollectibles. Like the income
statement approach, it satisfies the generally accepted
accounting principles of matching and conservatism. The
main disadvantage is that it does require more effort in
terms of calculations.

398
399

a.
2011
Dec. Bad Debt Expense............................
31
2,250
Allowance for Doubtful Accounts..
2,250

(95,000 x 1% = 950) + (35,000 x 4% = 1,400)
+
(8,000 x 10% = 800) + (2,000 x 60% = 1,200)
=
4,350; 4,350 2,100 = 2,250.
b.
2012
Dec. Bad Debt Expense............................
31
39,010
Allowance for Doubtful Accounts.....................
39,010

(215,000 x 1% = 2,150) + (95,000 x 4% =
3,800) +
(35,100 x 10% = 3,510) + (15,000 x 60% =
9,000) =
18,460; 18,460 4,350 + 24,900 =

39,010.
c.
Assets
Current assets:
Accounts receivable.............................

$360,1
00
399
400
Less: Allowance for doubtful accounts........................
18,46
0
$341,64
0
OR
Accounts receivable (net)................................................
Calculations:
Accounts Receivable
Bal. Dec
31/11
140,00
0
2012 sales 1,240,

2,250
000
Bal. Dec
31/12
39,01
0
$341,64
0
2012
collectio
995,0 ns
00
2,100
Unadj.Bal. Dec
31/11
Adjustment
2012
write24,90 offs
0
Dec 31/11
360,10
0
4,350 Adj. Bal. Dec

31/11
2012
writeoffs
24,9
00
Adjustment
Dec 31/12
18,46 Adj. Bal. Dec
0
31/12

400
401

Analysis component
One of the ways to apply the balance sheet approach is to
use an aging analysis of outstanding receivables. The
main advantage of the aging analysis is that it adjusts the
allowance for doubtful accounts to the estimated amount
of uncollectible receivables based on a detailed analysis
that considers the risk associated with the age of a
receivable. Like the income statement approach, it
satisfies the generally accepted accounting principles of
matching and conservatism. The main disadvantage is that
it does require more effort in terms of calculations.
However, computerization of the accounting information
system has negated that disadvantage.
May 3
1,100
Bad Debt Expense....................

1,100
Accounts Receivable Wilma Benz
To write-off an uncollectible receivable using the
direct write-off method.
Analysis component:
Using 2% of credit sales, bad debt expense would be $5,600 (280,000 2%
= 5,600) for 2011 thereby decreasing net income by $4,500 more than the
direct write-off method. Using 4% of outstanding accounts receivable would
result in a bad debt expense of $2,940 (46,000 4% = 1,840 + 1,100 =
2,940) thereby decreasing net income by $1,840 more than the direct writeoff method.

Mar. 21 Notes Receivable..................... 6,200.00
Accounts ReceivableBradley Brooks
6,200.00
To record 6-month, 10% note to replace
past-due account.
Sept. 21 Accounts ReceivableBradley Brooks
Interest Revenue.................
Notes Receivable.................
To record dishonoured note;
$6,200 0 .10 6/12 = $310.00.
6,510.00
310.00
6,200.00
401
402
Dec. 31 Allowance for Doubtful Accounts

6,510.00
Accounts ReceivableBradley Brooks
6,510.00
To record write-off of Brooks account.

402
403

Oct. 31
5,000.00
Notes ReceivableLeann Grimes

Accounts ReceivableLeann Grimes
5,000.00
To record 6-month, 8% note to replace

past-due account.
Dec. 31 Interest Receivable.................. 66.67

To record accrued interest;
$5,000 .08 2/12 = $66.67.
66.67
Apr. 30
Cash........................................ 5,200.00
Notes ReceivableLeann Grimes
5,000.00
...........................................Interest Revenue
133.33.....................................
Interest Receivable................................
66.67
To record collection of note and interest;
$5,000 .08 4/12 = $133.33.

403
404

2011
Dec. 16 Notes Receivable.....................17,200.00
Accounts ReceivableCarmel Karuthers
17,200.00
To record 60-day, 7% note to replace
past-due account.
31
Interest Receivable..................
To record accrued interest;
$17,200 0.07 15/365 = $49.48.
49.48
31
Interest Revenue.....................
49.48
Income Summary.................
To record the closing of the Interest
Revenue account.
49.48
49.48
2012
Feb. 14 Cash........................................17,397.92
148.44
Interest Receivable..............
49.48
17,200.00
To record collection of note plus interest;
$17,200 x 0 .07 x 60/365 = 197.92;
197.92 49.48 = 148.44.
Mar. 2
8,000.00
17
3,200.00
May 31
Notes Receivable..........................8,000.00
Accounts ReceivableATW Company
past-due account.
Notes Receivable..................... 3,200.00
Accounts ReceivableLeroy Johnson
past-due account.
Cash........................................ 8,157.81
157.81
8,000.00
To record collection of note plus interest;
$8,000 0.08 90/365 = $157.81.

404
405

Aug. 2
Accounts Receivable................ 6,295.00

Sales...................................
6,295.00
To record sales on credit.
Cost of Goods Sold................... 3,150.00

Merchandise Inventory...............
3,150.00
Cash........................................18,488.45
Factoring Fee Expense............. 281.55
18,770.00
To record sale of accounts receivable;
$18,770 .015.
15
Cash........................................ 3,436.00
3,436.00
To record collection from credit customers.
25
Cash........................................10,000.00
Notes Payable.....................
10,000.00
To record note; pledged $14,000 of accounts
receivable as security for the loan.
Note:
Accounts receivable in the amount of $14,000 are pledged as
security for a $10,000 note payable to Fidelity Bank.

405
406

Jan. 20
Note Receivable.......................170,000.00
Accounts Receivable Steve Soetart
170,000.00
Received note in settlement of account.
Feb. 19 Cash........................................170,487.58
487.58
170,000.00
Discounted a note receivable.
Principal of Note......................$170,000.00
Add: Interest from Note ($170,000 9% 90/365)
3,772.60
Maturity Value.........................$173,772.60
Less: Bank Discount ($173,772.60 11.5% 60/365)
3,285.02
Proceeds.................................$170,487.58

Part 1
Accounts Receivable
Turnover
$7,280
= 13.43
Days Sales Uncollected
times
$598
days
($598 + $486)/2
$7,280
365
29.98
Part 2
406
407
WestCon is not collecting its receivables as quickly as the

industry average which is generally unfavourable. WestCon
has more days of uncollected sales (or receivables) than the
industry average, also unfavourable.
Chapter 11
EXERCISES
Payroll Liabilities

Regular pay (172 hours @ $12.50).
$2,150.00
Overtime premium pay (12 hours @ $6.25)
75.00
Gross pay.....................................
$2,225.00
EI deduction ................................ $ 41.61
CPP deduction..............................
95.70
Income tax deduction ($151.00 + $201.30)
352.30
Total deductions...........................
489.61
Net pay........................................
$1,735.39
Deductions
Employee
Gross
EI
Pay
Premium
Income
Taxes
Total
Deduction
Insurance
s
Net Pay
Health
CPP*
Hellena
Chea
720.00
13.461
133.55
32.315
24.00
203.32
516.68
Joseph Lim
610.00
11.412
104.65
26.866
24.00
166.92
443.08
Dino Patelli
830.00
15.523
169.70
37.757
36.00
258.97
571.03
Sharl
Qulnata
1,700.00
31.794
486.90
80.828
24.00
623.51 1,076.49
Totals
3,860.00
72.18
894.80
177.74
108.00
1,252.72 2,607.28
*$3,500 exemption 52 weeks = $67.31 exempt per week
1. $720 1.87% =
$13.46
5. ($720 $67.31)
4.95% = $32.31

407
408
2. $610 1.87% =
$11.41
6. ($610 $67.31)
4.95% = $26.86
3. $830 1.87% =
$15.52
7. ($830 $67.31)
4.95% = $37.75
4. $1,700 1.87% =
$31.79
8. ($1,700 $67.31) 4.95% = $80.82
May
894.80
108.00
Office Salaries Expense.................3,860.00

Employees Income Taxes Payable
CPP Payable........................
Employees Health Insurance Payable
EI Payable...........................
Salaries Payable..................

177.74
72.18
2,607.28
408
409

Deductions
Employee Gross
Pay
EI
Pay
Income United
Premiu
m
Taxes
Way
Total
Distribution
Net Pay
Deduction
s
CPP
Office
Sales
Salaries Salaries
Akerley,
D.
1,900.0
0
35.53 421.65 80.00 87.39
624.57
1,275.4
31,900.00
Nesbitt,
M.
1,260.0
0
23.56 218.60 50.00 55.71
347.87 912.13
1,260.0
0
Trent, F.
1,680.0
0
31.42 348.35 40.00 76.50
496.27
1,183.7
3
1,680.0
0
Vacon, M.
3,000.0
0
56.10 815.00
300.0 141.8
0
4
1,312.94
1,687.0
6
3,000.0
0
Totals
7,840.0
1,803.6 470.0 361.4
0 146.61
0
0
4
2,781.65
5,058.3
5,940.0
51,900.00
0

Deductions
Distribution
Canad
a
EI
Incom
Unite
Total
Savin
Gross
e
d
Premiu
gs
Deduction
Employee Pay
m
Taxes Bonds CPP Way
s
Crimson, 1,995.
150.0
L.
00 37.31276.30
084.3299.75
Long, M.
2,040.
00 38.15306.95
102.0
-0-86.54
0
Morris, P.
2,000.
00 37.40295.70
-0-84.56
100.0
0
647.68
Pay
Net
Pay
Office Sales
Salarie Salarie
s
s
1,347. 1,995.0
32
0
1,506.
533.64
36
2,040.0
0
1,482.
34
2,000.0
0
517.66

409
410
Peterson, 2,280.
200.0
114.0
B.
00 42.64305.75
098.42
0
Totals
1,519.
760.81
19
2,280.0
0
8,315.
1,184. 350.0 353.8 415.7
5,855. 1,995.0 6,320.0
00 155.50
70
0
4
5 2,459.79
21
0
0

Deductions
Payment
Distribution
EI
Total
Gross Premiu Income
United Deduction
Office
Employee Pay
m
Taxes CPP* Way
s
Net Pay Salaries
Sales
Salaries
Crimson,
L.
1,995.0
0 37.31 295.70 84.32 99.75
667.08
Long, M.
2,040.0
0 38.15 306.95 86.54102.00
1,506.3
533.64
6
2,040.00
2,000.0
Morris, P.
0 37.40 295.70 84.56100.00
1,482.3
517.66
4
2,000.00
Peterson, 2,350.0
101.8
B.
0 43.95 380.50
9117.50
843.84
1,506.1
6
2,350.00
Totals
1,327.9
21,995.00
8,385.0
1,278.8 357.3
5,822.7
0 156.81
5
1419.25 2,562.22
81,995.00

6,390.00
410
411

Monthly salary...................
$2,050.00
CPP deducted.....................$ 87.04
EI deducted........................ 38.34
Income tax withheld........... 308.80
434.18
Salary, net of deductions....
$1,615.82
.........................................
0.02
Monthly contribution..........
32.32
Feb.
28
Salaries Expense......................................
2,050.00
EI Payable............................................
38.34
CPP Payable.........................................
87.04
Employees Income Taxes Payable......
308.80
United Way Payable.............................
32.32
Salaries Payable..................................
1,583.5
0

Mar. 24
Salaries Expense................................................
65,950.
00
EI Payable.....................................................
1,233.27
CPP Payable..................................................
3,097.93
Employees Income Taxes Payable...............
28,439.95
Medical Insurance Payable............................
1,150.00
United Way Payable......................................
1,319.00
Salaries Payable............................................
30,709.85

Mar. 24
EI Expense (1,233.27 1.4)..............................
1,726.5
8
CPP Expense......................................................
3,097.9
3

411
412
EI Payable.....................................................
1,726.58
CPP Payable..................................................
3,097.93

Apr. 15
EI Payable (1,233.27 + 1,726.58)......................
2,959.8
5
CPP Payable (3,097.93 x 2)................................
6,195.8
6
Employees Income Taxes Payable....................
28,439.
95
Cash..............................................................

37,595.66
412
413

1. May5 EI Expense................................ 101.05
CPP Expense............................. 177.74
EI Payable ($81.06 1.4)......
CPP Payable.........................
101.05
177.74
2.
5Benefits Expense..........................494.00
Employees Health Insurance Payable
108.00
Employees Retirement Program Payable
386.00

Retirement Fund
Health
CPP Contribution
Insurance
Doherty
$36,000 1.87% =
EI Contribution
Contributions
($36,000 3,500) 4.95% = $1,608.75

673.20 $ 3,600.00$1,440.00
Fane. .
1,910.70
729.30 6,100.00 1,440.00
Kahan
1,910.70
729.30 5,900.00 1,440.00
Martin ($37,000 3,500) 4.95% = 1,658.25$37,000 1.87% =

3,700.00
1,440.00
Poon. .
1,440.00
Totals
$7,200.00
1,910.70
$8,999.10
729.30
691.90
4,800.00
$3,553.00$24,100.00
Payroll taxes and fringe benefits as a percentage of salaries:

$8,999.10 + ($3,553.00 1.4) +
=
$24,100 + $7,200
18.79%
$241,000
Apr. Salaries Expense ($2,080 12)......................... 24,960.0
30
0
413
414
30
EI Payable ($38.90 12)...............................
466.80
CPP Payable ($88.52 12)............................
1,062.24
Employees Income Taxes Payable (315.70

12)...................................................................
3,788.40
Salaries Payable............................................
19,642.56
EI Expense ($466.80 1.4) ...............................
653.52
CPP Expense.......................................................
1,062.24
Benefits Expense Retirement Program............
1,996.80
Benefits Expense Medical Insurance ($50

12)......................................................................
600.00
EI Payable......................................................
653.52
CPP Payable...................................................
1,062.24
Retirement Program Payable.........................
1,996.80
Medical Insurance Payable............................
600.00

414
415

Jan.31
Benefits Expense.......................... 22,507

Estimated Vacation Payable.....
22,507
$ 96,000 (2/50) = $ 3,840

224,0001 (4/48) = 18,667
$320,000
$22,507
1. 320,000 x 70% = 224,00

and
Questions
1. The four financial statementsare: the incomestatement,the balancesheet, the statementof ownersequity,
and the cashflowstatement.
2. An income statement reports on the businesss performance during the period. It shows whether the
business earned a net income(also called profit). The statement does not simply report the amount of net
incomeor loss but lists the typesandamountsof the revenuesandexpenses.
3. A revenueis an inflowof assetsreceivedin exchangefor goodsor servicesprovidedto customersas part of
the major or central operations of the business. A revenue also may occur as a decrease in liabilities as
whena serviceor productis deliveredhavingbeenpaid for in advance.
4. An income statement user must know what time period is covered to judge whether the companys
performance is satisfactory. For example, a statement user would not be able to assess whether the
amountsof revenueand net incomeare satisfactorywithoutknowingwhethertheywereearnedover a week,
a month,or a year.
5. A businesssequity is increasedby investmentsinto the businessmadeby the ownerand by net income.It
is decreased by withdrawals made by the owner and by a net loss, which is the excess of expenses over
revenues.
6. The balancesheet reportson the financial positionof a businessat a specific point in time. It is oftencalled
the statement of financial position. It provides information that helps users understand a companys
financial status. The balancesheet lists the types and dollar amountsof assets, liabilities, and equity of the
business.
7. (a) Assets are probable future economicbenefits obtained or controlled by a particular entity as a result of
past transactions or events. (b) Liabilities are probable future sacrifices of economic benefits arising from
present obligationsof a particular entity to transfer assets or provide servicesto other entities in the future
415
416
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) The term net assets means the same thing as equity, which is
also determinedas assetsless liabilities.
8. The equity sectionof the balancesheet reportsa Carol Finlay, Capital account. The presenceof the owners
capital accountindicatesthat FinlayInteriorshas beenorganizedas a sole proprietorship.
9. The objectivity principle requires financial statement information to be supported by evidence other than
someonesopinionor imagination(suchas sourcedocuments). This principleincreasesthe reliability of the
financialstatements.
10. This treatmentis requiredby the cost and going-concernprinciples.
11. The revenuerecognitionprinciple providesguidancethat managersand auditors need for knowingwhento
recognize revenue. For example, if revenue is recognized too early, the income statement reports income
earlier than it should and the business looks more profitable than it really is. On the other hand, if the
revenueis not recognizedon time, the incomestatement showslower amountsof revenueand net income
than it should and the business looks less profitable than it really is. Basically, this principle requires
revenue to be recognized when it is earned and can be measured reliably. The amount of revenue should
equal the valueof the assetsreceivedfromthe customers.
QUICK STUDY
Quick Study 2-1
8. SP
9. C
10. P
11. SP
12. C
13. C
14. P
Quick Study 2-2
a. Business entity principle
b. Revenue recognition principle
c. Cost principle
Quick Study 2-3
6. Revenue Recognition
7. Objectivity and Cost
8. Business Entity
9. Going Concern
10. Monetary Unit

416
417
Quick Study 2-4

Monetary
Unit
1 Delco performed work for a client located in China

. and collected 8,450,000 RMB (Chinese currency),
the equivalent of about $1,320,000 Canadian. Delco
recorded it as 8,450,000.
Revenue
Recognition
2 Delco collected $180,000 from a customer on

. December 20, 2011 for work to be done in February,
2012. The $180,000 was recorded as revenue
during 2011. Delcos year end is December 31.
Going
Concern
3 Delcos December 31, 2011 balance sheet showed

. total assets of $840,000 and liabilities of
$1,120,000. The income statement for the past 6
years has shown a trend of increasing losses.
Cost
4 Included in Delcos assets was land and building

. purchased for $310,000 and reported on the balance
sheet at $470,000.
Objectivity
5 Delcos bank manager wants to verify the revenues

. and has asked for the sales receipts. Delco says
that they do not issue receipts but call customers
and advise them of the amount owing.
Business
Entity
6 Delcos owner, Tom Del, consistently buys personal

. supplies and charges them to the company.
Quick Study 2-5

a. Owners equity
=$ 75,000
34,500
$ 85,500
c. Assets
=$187,500
+$ 95,400
$ 40,500 =
=
=
$214,500
$282,900
Quick Study 2-6

a. Owners equity
=$374,700
$252,450
=
$122,250
$126,000 =
$ 24,900
417
418
c. Assets
=$ 37,650
+$112,500 =

$150,150
418
419
377
Edition
Quick Study 2-7

a.
b.
Allin Servicing
Allin Servicing
Income Statement
Income Statement
Revenues
$300
Revenues
$135
Expenses
125
Expenses
85
Net income (loss)
175
Net income (loss)
$ 50
Allin Servicing
Allin Servicing
Tim Allin, capital, April

1
$ 50
Add: Investments by
owner
$ 30
Net income
175
Total
Tim Allin, capital, May 1

Add: Investments by
owner
$240
$ 60
Net income
205
$255
1
50 $110
Total
350

419
75
420
5
Tim Allin, capital, April 30
$240
Allin Servicing
Balance Sheet
April 30, 2011
Assets
Cash
Equipment
Liabilities
$ 60
205
Accounts payable
$ 25
Owner's equity
Tim Allin, capital
240

Total assets
$26
5
owner's equity
$265

420
421
Quick Study 2-8

3. $20,000 Assets - $15,000 Liabilities = $5,000 beginning capital on
January 1, 2011
4. $5,000 + $3,000 + $8,000 - $4,000 = $12,000 ending capital on
December 31, 2011
(Beginning Capital + Investments + Net Income
Withdrawals = Ending Capital)
Quick Study 2-9
The source documents include:
c. Telephone bill
d. Invoice from supplier
g. Bank statement
h. Sales invoice
Quick Study 2-10
Assets
Liabilitie +
s
Equity
a.
Increase/Decrease
b.
Increase
c.
Decrease
d.
e.
Increas
e
Decrea
se
Increase
Decrease
Decrease
Decrease
Quick Study 2-11

c
1.
Supplies.......................... $1
0
2.
Supplies expense.................. 22

421
422
3.
Accounts receivable.............. 25
4.
Accounts payable.................. 12
5.
Equipment............................. 40
6.
Tim Roadsters withdrawals 35

in April...................................
7.
Notes payable....................... 30
8. Utilities expense............... 10
9. Furniture................................. 20
10 Fees earned............................ 70
.
11 Rent revenue.......................... 35
.
12 Salaries expense.................... 45
.
13 Tim Roadsters investments 60

. in April....................................
a+ 14 Net income*........................... 28
b
.
*Calculated as: 70 + 35 22 10 45 = 28

422
423
Quick Study 2-12

1 Total revenues...................
.
70 + 35 = 105
2 Total operating expenses.........

.
22 + 10 + 45 =
77
3 Net income...............................
.
105 77 = 28
4 Total assets..............................
.
10 + 25 + 40 +
20 = 95
5 Total liabilities..........................
.
12 + 30 = 42
6 Tim Roadster, capital (April 30,

. 2011).......................................
60 35 + 28 =
53
7 Total liabilities and owners

. equity.......................................
42 + 53 = 95
Quick Study 2-13

d
1. Net loss..........................
2 Income statement
2. Rent expense.......................
2 Income statement
2
3. Rent payable........................
4. Accounts receivable.............
1
4
5. Joan Bennishs investments

in May..................................
0 equity
6. Interest revenue...................
2 Income statement
7. Joan Bennish, capital, May 1,

2011.....................................
equity

423
424
8. Repair supplies................
9. Notes payable.......................
2
5
d 10 Joan Bennishs withdrawals

. in May...................................
equity
a 11 Truck.....................................
.
1
5
d 12 Consulting fees earned..........

.
1 Income statement
8
c 13 Joan Bennish, capital, May

. 31, 2011................................
a 14 Cash......................................
.
2
0
Quick Study 2-14

BENNISH CONSULTING
Income Statement
Revenues:
Interest revenue....................
Total revenues.......................
Operating expenses:
Rent expense........................
Net loss.....................................

$18
2
$20
22
$ 2
424
425
Quick Study 2-14 (concluded)

BENNISH CONSULTING
Joan Bennish, capital, May 1....
Total ..................................
Net loss.........................
Joan Bennish, capital, May 31. .
$ 0
30
$30
$5
2
7
$23
BENNISH CONSULTING
Balance Sheet
May 31, 2011
Assets Liabilities
Cash..........................
Accounts receivable....
Repair supplies..........
.............................
$20
14
5
Owners Equity
Truck.........................
15
........................ 23
Total assets...............
$54
Rent payable..........
Notes payable.........
$ 6
25
$31
Joan Bennish, capital

owners equity....

$54
425
426
EXERCISES
i) $80,000 Revenue $65,000 Expenses = $15,000 Net Income
j) $92,000 Revenue $149,000 Expenses = $57,000 Net Loss
k) $86,000 Ending Equity - $10,000 Beginning Equity = $76,000 Net
Income
(no Withdrawals and no Investment)
l) $25,000 Beginning Equity + $40,000 Investment $52,000 Ending

Equity = $13,000 Net Loss
(no Withdrawals)
(a)
Answers
Proofs:
Owners equity,
January 1..........................
(b)
(c)
(d)
(e)
$) $36,00 $12,00 $21,00 $92,00

(24,750
0
0
0
0
$
0
$
0
$
0
$ $92,00
0
0
Owners investments
the year............................
60,000 36,000 31,500 37,500 150,00

0
15,75
0
40,50
0
(4,50) 21,000
0
(8,000)
Owners withdrawals
during the year ........ (24,750) (27,00) (15,00) (15,75) (63,00)

426
427
Owners equity,
$51,000 $49,50 $12,00 $42,75 $171,0
December 31....................
0
0
0
00

427
428

THE DOBBS GROUP
Income Statement
Revenues:
Operating expenses:
Rent expense........................
2,550
1,680
660
Net income................................
$18,000
10,890
$ 7,110

THE DOBBS GROUP
Net income......................
7,110
Total ..................................
$
0
84,000
91,110
$91,110
3,360
$87,750
Analysis component:

$7,110).
$87,750.

428
429

THE DOBBS GROUP
Balance Sheet
November 30, 2011
Assets Liabilities
Cash..........................$12,000
Automobiles............... 36,000
Total assets...............$95,250

Owners Equity
Analysis component:

of The Dobbs Group.
Income Statement
Revenues:
Total revenues....................
Operating expenses:
1,540
580
Net loss.....................................

$4,200
300
$ 4,500
4,620
$
120
429
430

Total ..................................
Net loss.........................
120
$ 7,400
1,200
$ 8,600
1,120
$ 7,480
Analysis component:
$80.
Balance Sheet
July 31, 2011
Assets Liabilities
Cash..........................$ 1,600
1,400
Supplies.....................
600
Furniture................... 1,800
...............
7,480
Owners Equity

430
431
Total assets........................
2,200
$8,880
$8,880
Analysis component:

431
432
Description

imagination.
a.
Assets Liabilities=
Owners
Equity
$60,000
=
........................$90,000
End of the year.............$240,000$92,000 = 148,000
Net income..................................................... $58,000

Net income....................................$100,000
42,000
$90,000 + x - $42,000 = $148,000; x = $100,000
Net loss......................................... $ 7,000
$90,000 + $65,000 + x = $148,000; x = ($7,000) where the
432
433

Net income.................................... $50,000
42,000
$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000
a.
$20,000 + $5,000 = $25,000 Assets at August 1, 2011.
$24,000
b.
$16,000
Assets
Cash
a)
Total
s
Liabilities +
Owners
Equity
Accounts
Receivab
Office
Accounts
Noel Bridges,
+
le
Capital
+
$2,500
+ $2,500
2,500
2,500

433
434
b)
Total
s
c)
Total
s
2,500
+
+ $200
+ $200
200
200
600
2,500
+
600
3,100
200
200
3,100
3,100
200
200
3,100
d)*
Total
s
e)
Total
s
1,500
1,600
f)
Total
s
1,500
200
200
+
$1,250
$1,600
$1,250
$3,050
1,600
+ 1,250
$200
$200
$2,850
$3,050

required.

434
435

Assets
Cash
Liabilitie +
s
Owners
Equity
Accounts
Parts
Receivabl
Supplie
Equipme
Accounts
+
e
+
s
+
nt
= Payable +
Janine
Commry,
Capital
a)
+ $7,000
+ $ 7,000
b)
- 2,500
- 2,500
Totals
$4,500
$ 4,500
c)
Totals
$4,500
d)
Totals
e)
Totals
+ $1,200
+ $1,200
$1,200
$1,200
+ $3,400
$4,500
$3,400
+ $ 3,400
$1,200
$ 950
$3,550
$ 4,500
$1,200
$7,900
$1,200
$7,900
$1,200
$ 7,900
+ $950
$3,400
$1,200
$950
f)*
Totals
g)
Totals
h)
Totals
i)
Totals
$3,550
$3,400
$1,200
$950
$1,200
$2,350
$1,200
$3,400
$1,200
$950
+ $1,400
$3,750
+ $ 1,400
$3,400
$1,200
$950
$2,700
$1,050
$7,900
$9,300
$ 2,700
$3,400
$1,200
$6,600
$950
$6,600
$6,600

required.

435
436

b.
c.
d.
e.
f.
g.


436
437

q) The business purchased land paying $3,000.
r) $400 of office supplies were purchased on credit (or on
account).
s) Paid $700 for the purchase of office supplies
t) $1,050 of revenue on account (or on credit) was earned.
u) Collected $1,000 cash for revenue performed.
v) Paid $400 to a creditor.
w)Collected $1,050 from a credit customer.
x) The owner invested $5,000 of land.
Explanation
Payable
Capital of Change
a. $25,000
$5,000
b. 1,300
Expense
$23,700
$5,000
c.
$23,700
d.
+6,000
+6,000
$11,000
$6,000
$11,000
$6,000
+$1,000
$1,000
f. 4,000
$20,200
h. +
250
Rent
$28,700
500
$11,000
Revenue
$29,200
+ 1,000
$6,000
$30,200
$6,000
$30,200
Revenue
+ 4,000
$1,000
$15,000
g. 1,200
Expense
$19,000
$1,300
$24,200
$24,200
Investment
$28,700
+ 500
e.
$30,000
1,200
$1,000
$15,000
$6,000
Wages
$29,000
250

437
438
$19,250
i.
$750
$15,000
$6,000
6,000
$13,250
j.
$29,000
6,000
$750
$15,000
$29,000
250
$13,000
$28,750
$750
$28,750
Revenue
($500 + $1,000)
$15,000
250
Withdrawal
$28,750
Expenses
=
Net loss
($1,300 + $1,200) =

$1,000
438
439

asset) for cash.
cash.
on credit.
receivable.
Assets
Cash
Liabiliti +
es

Receivab s
nt
s
Deweer
n
le
Payable
d,
Capital
a)
b)
Total
s
d)
Owner
+$2,500 Investment
+ $2,500
+ $4,000
$4,000
+$4,000 Revenue
$
c)
Total
s
Owners Equity
$2,500
+ $150
$4,000
$150
$6,500
+ $150
$2,500
$150
$ 450

$6,500
$ 450 Sal.
Expense
439
440
Total
s
$3,550
$150
$2,500
$150
$6,050
$3,550
$150
$2,500
$150
$6,050
e)*
Total
s
f)
Total
s
$
1,400
$2,150
g)
Total
s
$ 1,400 Rent
Expense
$
$150
$2,500
$150
+ $2,000
$2,150
$2,000
$6,800
$4,650
+$2,000 Revenue
$150
$2,500
$150
$6,650
$6,800

required.

440
441

Income Statement
Revenues:
$6,000
Operating expenses:
Salaries expense
Rent expense
450
1,40
0
1,85
0
Net income
$4,1
50


Add:
Investment by owner
Net income
$2,500
4,15
0

6,65
0
441
442
$6,6
50

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$2,1
50
Accounts payable
$
150
Accounts 2,00
receivable
0
Supplies
Equipment
150
2,50
0
Owners Equity
Total assets
$6,8
00
6,65
0

equity
00

442
443

Analysis component:
g. Supplies of $150 were financed by accounts payable, a liability.
h. Equipment of $2,500 was financed by owner investment, an
equity transaction.
i. Cash of $2,150 and Accounts receivable of $2,000 were
Assets
Cash
a)
+
$500
+$400
$500
Owner
+$15,500 Investment
+$15,000
c)
Total
s
Owners Equity

Explanatio
Receivab s
nt
s
Jong,
n
le
Payable
Capital
b)
Total
s
Liabiliti +
es
$400
+$400
$15,000
+$600
$400
$15,500
+$600
$500
$1,000
$15,000
$1,000
$15,500
$500
$1,000
$15,000
$1,000
$15,500
d)*
Total
s
e)
Total
s
+$550
$500
f)
Total
s
$550
+$550 Revenue
$1,000
$15,000
$1,000
+$600
$500
$1,150
$16,050
+$600 Revenue
$1,000
$15,000
$1,000

$16,650
443
444
g)
-$200
Total
s
$300
h)
-$250
Total
s
$50
-$200
$1,150
$1,000
$15,000
$800
$16,650
-$250 Adv.
Expense
$1,150
$1,000
$17,200
$15,000
$800
$16,400
$17,200

required.

444
445

Petes Yard Care
Income Statement
Revenues:
Yard care revenue
$1,150
Operating expenses:
Advertising expense
250
Net income
$
900
Petes Yard Care

Add:
Investment by owner
$15,500
Net income
900
16,40
0
$16,4
00
Petes Yard Care

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$
50
Accounts payable

445
446
800
Accounts 1,150
receivable
Supplies
Equipment
1,000
15,000
Owners Equity
Pete Jong, capital
16,40
0

Total assets
$17,20
0
owners equity
$17,2
00
Analysis component:

446
447

Assets
Cash
Bal.
$1,200
+$1,000
-$1,000
Total
s
$5,000
$200
b)
-$2,000
Total
s
$3,000
c)
+$700
Total
s
$3,700
d)
-$500
Total
s
$3,200
e)
-$1,200
Total
s
$2,000
f)
-$600
Total
s
$1,400
g)
Total
s
Owners Equity

Otto
Receivab s
nt
s
Ingles,
le
Payable
Capital
$4,000
a)
Liabiliti +
es
$900
$7,500
$4,000
$9,600
$900
$7,500
$4,000
$9,600
-$2,000
$200
$900
$7,500
$2,000
$9,600
+$700 Revenue
$200
$900
$7,500
$2,000
$10,300
-$500 Wage
Exp.
$200
$900
$7,500
$2,000
$9,800
-$1,200 Rent Exp.
$200
$900
$7,500
$2,000
$8,600
-$600 Utilities
Exp.
$200
$900
$7,500
$2,000
+$400
$1,400
Explanati
on
$600
$8,000
+$400 Revenue
$900
$7,500
$2,000
$8,400
h)*
447
448
Total
s
$1,400
$600
$900
$10,400
$7,500
$2,000
$8,400
$10,400

required.

448
449

Income Statement
Revenues:
Wrecking revenue
$1,100
Operating expenses:
Rent expense
$ 1,200
Wages expense
500
Utilities expense
600

Net loss
2,30
0
$1,2
00

$ 9,600
Less: Net loss
1,200
$
8,400

Balance Sheet
July 31, 2011
449
450
Assets
Cash
Accounts
receivable
Supplies
Equipment
Liabilities
$1,400
Accounts payable
$
2,000
600
900
7,500
Owners Equity
8,400

Total assets
$10,40
0
owners equity
$10,4
00
Analysis component:
$8,400 or 80.77% (calculated as $8,400/$10,400 100) of the
assets are financed by Otto Ingles, the owner. $2,000 or
19.23% (calculated as $2,000/$10,400 100) of the assets are
financed by debt.

450
451
PROBLEMS
Year
2011
Beginning
capital
+
Owner
investment
+ Net
(loss)
income
2010
125,0001
0
(5,000)
Owner
withdrawals
= Ending capital
120,000
2009
28,0003
10,000
175,000
60,0005
78,000
42,000
125,0002
28,0004
Note: The superscripts show the order in which the answers were
calculated.
Calculations:
6. $120,000 + 5,000 = $125,000
8. $125,000 + $78,000 - $175,000 = $28,000
10.
$28,000 + $42,000 - $10,000 = $60,000
BEE-CLEAN
Income Statement
Revenues:
Service revenue.....................
$142,000
451
452
Repair revenue......................
Total revenues....................
Operating expenses:
Wages expense..................... $52,000
Rent expense........................ 24,000
Supplies expense................... 11,400
9,800
Interest expense....................
500
Net income................................

6,000
$148,000
97,700
$ 50,300
452
453

BEE-CLEAN
Bee Cummins, capital, August 1, 2010
Net income...................... 50,300
Total ..................................
Bee Cummins, capital, July 31, 2011
$79,300
$
-050,300
$129,600
34,000
$95,600
BEE-CLEAN
Balance Sheet
July 31, 2011
Assets
Cash........................
Accounts receivable.
Supplies..................
Prepaid rent............
Office equipment.........
Furniture.................
$
11,
800
56,00
0
2,400
12,00
0
29,200
19,0
00
$130,
400
Liabilities
Accounts payable...
Notes payable........
Total liabilities . . . .
$
14,
800
20,0
00
$
34,800
Owners Equity
Bee Cummins,
capital...............
95,60
0

owners equity. . . $130,4
00

453
454

Balance Sheet
December 31, 2010
Assets
Liabilities
Cash...................$ 26,250
$
3,750
Accounts receivable
14,250
2,250
Trucks................. 27,000
Owners Equity
1
135,000
Total assets
$138,750
owners equity.....
$138,750
_____________________
Calculations:
3. $138,750 $3,750
unknown amount)
$135,000

(calculation
of
454
455

Balance Sheet
December 31, 2011
Assets
Liabilities
Cash................... $ 9,375
$
18,750
Accounts receivable
11,175Notes payable
.......... 52,500
1,650
Total liabilities...... $71,250
Trucks................. 27,000
Land................... 22,500
Owners Equity
Building.............. 90,000
2
163,950
Total assets.........$235,200
owners equity.....
........$235,200
Calculations:
4. $235,200 $71,250 = $163,950
Part 2
$163,950
135,000
Increase in owners equity during 2011
$ 28,950
17,500
apart from new investment..............
$ 11,450
Add: Withdrawals ($1,500 12)...........
18,000
Net income earned in 2011..................
$ 29,450
OR
$135,000 + $17,500 + x - $18,000 = $163,950; x =

$29,450

455
456
Analysis component:
Assets increased by $96,450 ($235,200 - $138,750). $67,500
of the increase in assets were financed by an increase in debt
(total liabilities went from $3,750 at December 31, 2010 to
$71,250 at December 31, 2011). The remaining $28,950
increase in assets ($96,450 - $67,500) resulted from equity
financing (equity increased to $163,950 at December 31,
2011 from $135,000 at December 31, 2010 because of
$17,500 owner investment plus $29,450 net income less
$18,000 of withdrawals during 2011).

456
457

Company A:
(a) Owners equity on December 31, 2010:
Assets....................................
Liabilities...............................
Owners equity.......................
$90,000
47,000
$43,000
(b)Owners equity on December 31, 2011:

..................................$43,000
Add: Owner investments................
Net income.......................
Less: Owners withdrawals.............
10,000
15,000
5,000
$63,000
(c) Amount of liabilities on December 31, 2011:

Assets....................................
$96,000
Owners equity.......................
Liabilities...............................
63,000
$33,000
Part 2
Company B:
(a) and (b)
Owners equity:
31, 2011
Assets....................................
Liabilities...............................
Owners equity.......................
Dec. 31, 2010

$70,000
45,000
$25,000
(c) Net income for 2011:

..................................$25,000
Add: Owner investments.........
Net income.......................
Less: Owner withdrawals.........
..................................$27,000
Dec.
$82,000
55,000
$27,000
3,000
?
6,000

457
458

Company C:
Dec. 31, 2010
Assets................................... $58,000
Liabilities..............................
28,000
Owners equity...................... $30,000
table:
$30,000
Add:.........Owner investments
15,500
Net income......................
18,000
7,750
$55,750
liabilities:
Dec. 31, 2011
Liabilities.............................. $38,000
Owners equity......................
55,750
Assets................................... $93,750
Part 4
Company D:
Dec. 31, 2010 Dec. 31, 2011
Assets................................... $160,000
$250,000
Liabilities..............................
76,000
128,000
Owners equity...................... $84,000
$ 122,000
.................................$84,000
Add: Owner investments........
Net income......................
?
24,000
0
458
459

...............................$122,000

459
460

Company E:
2011:
Assets...................................
Liabilities..............................
Owners equity......................
$225,000
150,000
$ 75,000

table:
Add: ........Owner investments
Net income......................
$
?
9,000
36,000
18,000
$75,000

Assets...................................
Owners equity......................
Liabilities..............................
Dec. 31, 2010

$246,000
48,000
$ 198,000

460

461

Assets
Liabilities
Owners Equity
Dan
+ Accounts + Office + Office +

Notes+ Murray,Explanation
Cash Receivable
Supplies Equipment
of Changes
= Accounts
Building Payable
(a) +$160,000
+$60,000
Investment
(b) 100,000
+$600,000
Bal. $ 60,000
$60,000 $600,000
(c)
8,000
+ $8,000
Bal.
$ 52,000
$8,000 $60,000 $600,000
$220,000
(d)
+72,000
+$72,000
Bal. $ 52,000
$8,000
$132,000 $600,000
$ 220,000
(e)*
Bal. $ 52,000
$8,000
$132,000
$600,000
$220,000
(f)
+$3,000
Revenue
Bal. $ 52,000
$3,000 $8,000
$132,000 $600,000
$223,000
(g)
2,000
Advertising Expense
Bal. $ 50,000
$3,000 $8,000
$132,000 $600,000
$221,000
(h) +
4,000
Service Revenue
Bal. $ 54,000
$3,000 $8,000
$132,000 $600,000
Payable
+
+$500,000
$500,000
Capital
$220,000
$ 220,000
$500,000
$72,000
$500,000
$72,000
$500,000
+3,000
$72,000
$500,000
$72,000
2,000
$500,000
+
$72,000
Service
4,000
$500,000
39
462
$225,000
(i)
4,000
Bal. $ 50,000
$225,000
(j) +
1,000
Bal. $ 51,000
$225,000
(k)
7,000
Wages Expense
Bal. $ 44,000
$218,000
(l)
3,600
Withdrawal
Bal. $ 40,400
$3,000
$8,000
$132,000
4,000
$600,000
1,000
$2,000
$8,000
$132,000
$600,000
$68,000
$500,000
$68,000
$500,000
$2,000
$8,000
$132,000
$600,000
$68,000
7,000
$500,000
3,600
+$2,000 +$8,000 +$132,000 +$600,000=$68,000 +$500,000+ $214,400

$782,400
*NOTE: For (e), since no exchange has occurred, no entry is required.
$782,400
463
Problem 2-5A (continued)

Part 3
Murray Enterprises
Income Statement
Revenues:
Service revenue
$7,000
Operating expenses:
Wages expense
$7,000
Advertising expense
2,00
0
9,000
Net loss
$2,000
Murray Enterprises
220,0
00
Total
$220,0
00
$ 3,600

463
464
Net loss
2,00
0
5,600
$214,4
00
Murray Enterprises
Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$
40,400
Accounts
receivable
2,000
Office supplies
8,000
Office
equipment
Building
Total assets
Accounts payable
$
68,000
Notes payable
500,00
0
Total liabilities
$568,0
00
132,00
0
600,00
0
$782,4
00
Owners Equity
Dan Murray, capital
$214,4
00

equity
$782,4
00

464
465

Analysis component:
Assets result from a combination of debt and equity financing (A = L
+ E). Murray Enterprises total assets of $782,400 resulted from
incurring $568,000 in liabilities ($68,000 in accounts payable plus
$500,000 of notes payable). $568,000/$782,400 x 100 = 72.597% or
73%. The remaining 27% of the assets were financed by equity
transactions (owner investment and net income or loss less
withdrawals made by the owner).

465

42
Edition
466

Assets
+ Accounts
+
Cash Receivable
= Liabilities
+
Office
= Accounts +
Supplies Payable
Owners Equity
Bev Ng,
Explanation
Capital
of
Change
Apr.1
1
3
5
Expense
8
Revenue
12
Revenue
15
Expense
20
22
Revenue
23
28
29
30
Expense
30
Expense
30
Expense
30
+$120,000
6,400
3,360
1,600
+
+ $3,360
9,200
+$6,000
1,700
+6,000
+5,600
2,000
6,000
+5,600
5,600
+ 2,000
+$120,000
6,400
Investment
Rent Expense
1,600
Cleaning
9,200
Consulting
6,000
Consulting
1,700
Salaries
5,600
Consulting
+ $2,000
2,000
120
120
Advertising
400
400
Telephone
960
960
Utilities
1,700
Salaries
1,700

466
467
Expense
30
2,400
$120,280 +$
$125,640
$5,360= $

120
2,400
$125,520
$125,640
467
Withdrawal
468

KEEP-SAFE
Income Statement
Revenues:
Consulting services revenue.....
Operating expenses:
Rent expense...........................
Cleaning expense.....................
Total operating expenses.....
Net income...................................
$20,800
$6,400
3,400
1,600
960
400
120
12,880
$ 7,920
KEEP-SAFE
Bev Ng, capital, April 1................
Add: ...........Investments by owner
Net income............................
127,920
Total.........................................
Less: Withdrawals by owner..........
Bev Ng, capital, April 30...............
$
0
$120,000
7,920
$127,920
2,400
$125,520
KEEP-SAFE
Balance Sheet
April 30, 2011
Assets
Liabilities

468
469
Cash...................$120,280
Total assets........$125,640
Accounts payable.........$
120
Owners Equity
Bev Ng, capital............ 125,520
owners equity.......... $125,640
Analysis component:
99.9% of Keep-Safes total assets at April 30, 2011 were
$120,000 invested by the owner during the month plus net
income of $7,920 less owner withdrawals of $2,400. The
0.0955% or 0.1%).

469

470
Cash
Bal
.
Oct.
31
$80,0
00
Nov. 1
-5,600
Bal
.
$74,4
00
3
+21,6
00
21,60
0
Bal
.
$74,4
00
5
Bal
.
Bal
.
Office
Equip.
Electric
al
Equip.
Account
s
Payable
Larry
Power,
Capital
$7,000
$1,900
$28,000
$14,000
$18,000
$112,900
Explanation
of Change
-5,600 Rent expense

$7,000
$1,900
$28,000
$14,000
$18,000
$107,300
Owner
+21,600 investment
$7,000
$1,900
+
$28,000
+
$6,400
$28,000
$42,000
$24,400
$128,900
$28,000
$42,000
$24,400
$128,900
+1,800
$7,000
$3,700
+2,00
0
$74,6
00
Office
Supplies
-1,800
$72,6
00
Accounts
Receivab
le
Electrical fees
+2,000 earned
$7,000
$3,700
$28,000
+7,600
$42,000
$24,400
+7,600
$130,900
45
471
Bal
.
$74,60
0
15
Bal
.
$7,000
$3,700
$35,600
$42,000
$32,000
$130,900
Electrical fees
+6,000 earned
+6,000
$74,6
00
$13,000
$3,700
$35,600
$42,000
$32,000
$136,900
$74,6
00
$13,000
$3,700
$35,600
$42,000
$32,000
$136,900
*16
Bal
.
18
Bal
.
+1,000
$74,6
00
20
Bal
.
24
28
Bal
.
30
$4,700
$35,600
$42,000
-7,600
$67,0
00
Bal
.
$13,000
+1,000
$33,000
-7,600
$13,000
$4,700
$35,600
$42,000
$25,400
$67,0
00
$14,200
+
6,000
-6,000
$73,0
00
$8,200
$136,900
Electrical fees
+1,200 earned
+1,200
-4,400
$136,900
$4,700
$35,600
$42,000
$25,400
$138,100
$4,700
$35,600
$42,000
$25,400
$138,100
-4,400 Salaries expense
472
Bal
.
$68,6
00
30
Bal
.
$4,700
$35,600
$42,000
$25,400
$133,700
-1,400
$67,2
00
30
$8,200
-1,400 Utilities expense

$8,200
$4,700
$35,600
$42,000
$25,400
$132,300
Owner
-1,400 withdrawals
-1,400
$65,8
00
$8,200
$4,700
$156,30
0
$35,600
$42,000
$25,400
$130,900
=
$156,300
*Note: For November 16, since no exchange has occurred, no entry is required.
473

Analysis component:
Revenue is not recorded on November 28 because the
revenue was actually earned on November 15. The revenue
recognition principle requires that revenue be recorded when
it was incurred (when the economic exchange occurred), on
November 15. Cash is being collected on November 28 and is
recorded as a reduction of the asset, accounts receivable,
that was realized on November 15.
Problem 2-8A
POWER ELECTRICAL
Income Statement
Revenues:
Electrical fees earned.................
Operating expenses:
Rent expense.............................
Salaries expense........................
Utilities expense .......................
Total operating expenses.........
Net loss..........................................
$2,200
$9,200
$5,600
4,400
1,400
11,400
POWER ELECTRICAL
Larry Power, capital, November 1....
Add: Investments by owner.............
Total ...........................................
$134,500
Less: Withdrawals by owner............
Net loss....................................
Larry Power, capital, November 30. .
$112,900
21,600
$1,400
2,200

3,600
$130,900
473
474

POWER ELECTRICAL
Balance Sheet
November 30, 2011
Assets
Liabilities
Cash...................$65,800 Accounts payable

...........$25,400
Accounts receivable
8,200
Owners Equity
Electrical equipment
42,000Larry Power, capital
......... 130,900
Total assets.........$156,300
owners equity $156,300
Analysis component:
Power Electrical incurred a net loss of $2,200 for the month
ended November 30, 2011. Therefore, instead of helping to
finance assets, the November operating activities had a
negative impact on equity. Equity did increase during
November but because of an additional investment by the
owner. As a sole proprietor, a goal is to increase equity
because of positive earnings; not through owner investment.
Inco
me
Balance
Stmn
Sheet
t
Tota Tot
Net
l
al Equi Inco
Ass Liab ty
me
ets
.
Owner invests cash..... +
+
1
Sell services for cash...
2
474
475
Acquire services on
3 credit..........................
Pay wages with cash. . .
4
Owner withdraws cash.
5
6 payable.......................
Sell services on credit.
7
Buy office equipment
8 for cash......................
Collect receivable from
9 (7)..............................
1 Buy asset with note
0 payable.......................
+/
+/
+

475
476

2012
2011
146,0001
Beginning
capital
+
Owner
investment
2010
35,0003
income
183,000
163,000
Owner
withdrawals
69,000
52,000
= Ending capital
260,000
+ Net
(loss)
146,0002
0
50,000
(15,000)5
0
35,000
Note: The superscripts show the order in which the answers

were calculated.
Calculations:
6. 260,000 + 69,000 183,000 = 146,000
from 2011.
8. 146,000 + 52,000 163,000 = 35,000
from 2010.
10.
35,000 50,000 = -15,000
FIREWORKS FANTASIA
Income Statement
Revenues:
Fees earned..........................
Rent revenue.........................
Total revenues....................
$ 70,000
33,000
$ 103,000
476
477
Operating expenses:
$46,000
Fireworks supplies expense. . 41,000
Utilities expense................... 17,800
Advertising expense..............
4,500
Office supplies expense........
1,800
Net loss.....................................

111,100
$ 8,100
477
478

FIREWORKS FANTASIA
Wes Gandalf, capital, January 1
$187,600
15,000
Total ..................................
Less: Withdrawals by owner.... $26,000
Net loss ........................
8,100
Wes Gandalf, capital, December 31
$168,500
$202,600
34,100
FIREWORKS FANTASIA
Balance Sheet
December 31, 2011
Assets
Cash.....................$ 14,000
Accounts receivable
Fireworks supplies 16,000
Office supplies...... 1,500
Tools.................... 9,000
Building................ 62,000
Land..................... 56,000
168,500
Office equipment. . 12,000
Total assets..........$177,500
..........$177,500
Liabilities
Accounts payable $
7,000
9,000
Owners Equity
Wes Gandalf, capital
. owners equity

478
479

STILLER CO.
Balance Sheet
December 31, 2010
Assets
Cash........................ $ 14,000
Accounts receivable
25,000
10,000
60,000
Machinery...............
134,5001
30,500
Total assets............. $139,500

................$139,500
Liabilities
Accounts payable............$
5,000
Owners Equity
Joseph Stiller, capital.......
owners equity..............
STILLER CO.
Balance Sheet
December 31, 2011
Assets
Cash................... $
15,000
Accounts receivable
10,000
Liabilities
Accounts payable...
30,000
Notes payable............ 260,000
12,500
60,000
Total liabilities....275,000
Machinery...........
Building...................
30,500
260,000
Land.......................
193,0002
65,000
Owners Equity
Joseph Stiller, capital.
$468,000
owners equity.......$468,000

479
480
_____________________
Calculations:
1. $139,500 $5,000 = $134,500 (calculation of unknown
amount)
2. $468,000 $275,000 = $193,000 (calculation of
unknown amount)

480
481

Owners equity, December 31, 2011..... $193,000
Owners equity, December 31, 2010..... 134,500
Increase in owners equity during 2011 $ 58,500
25,000
apart from new investment............... $ 33,500
Add: Withdrawals ($1,000 12)...........
12,000
Net income earned in 2011.................. $ 45,500
Analysis component:
Assets increased by $328,500 ($468,000 - $139,500).
$270,000 of the increase in assets were financed by an
increase in debt (total liabilities went from $5,000 at
December 31, 2010 to $275,000 at December 31, 2011).
The remaining $58,500 increase in assets ($328,500 $270,000) resulted from equity financing (equity increased
to $193,000 at December 31, 2011 from $134,500 at
December 31, 2010 because of $25,000 owner investment
plus $45,500 net income less $12,000 of withdrawals
during 2011).
Company V:
(a) and (b)
Calculation of owners equity:
12/31/10
Assets............................. $45,000
Liabilities......................... 30,000
Owners equity................. $15,000
12/31/11
$49,000
26,000
$23,000
(c) Calculation of net income for 2011:

..........................$15,000
Add: Owner investments. .
Net income.................
Less: Owner withdrawals. .
6,000
?
4,500
481
482
..........................$23,000

482
483

Part 2
Company W:
(a) Calculation of equity at December 31, 2010:
Assets..............................
Liabilities..........................
Owners equity..................
$70,000
50,000
$20,000
(b)Calculation of equity at December 31, 2011:

...........................$20,000
Net income..................
...........................$58,000
10,000
30,000
2,000
(c) Calculation of the amount of liabilities at December 31,

2011:
Assets..............................
Owners equity..................
Liabilities..........................
$90,000
58,000
$32,000
Part 3
Company X:
12/31/10
12/31/11
Assets..............................$121,500
$136,500
Liabilities.......................... 58,500
55,500
Owners equity..................$ 63,000
$ 81,000
............................$63,000
?
Net income.................. 16,500
0
............................$81,000
483
484

484
485

Part 4
Company Y:
Assets..............................
Liabilities..........................
Owners equity..................
Dec. 31, 2010

$82,500
61,500
$21,000

table:
Net income.................
24,000
18,000
$21,000
38,100
$65,100

liabilities:
Liabilities..........................
Owners equity..................
Assets..............................
Dec. 31, 2011

$ 72,000
65,100
$137,100

485
486

Company Z:
2011:
Assets..............................
Liabilities..........................
Owners equity..................
$160,000
52,000
$108,000

table:
Net income..................
32,000
6,000
?
40,000
$108,000

Assets..............................
Owners equity..................
Liabilities..........................
Dec. 31, 2010

$124,000
42,000
$ 82,000

486

487

Assets
Cash
(a)
(b)
Bal
.
(c)
Bal
.
(d)
+
$50,0
00
10,00
0
$40,0
00
9,000
$31,0
00
_______
$31,0
00
1,500
Bal $29,5
.
00
(f) _______
$29,5
00
+
Liabilities
+
$5,00
0
Bal
.
(e)
Bal
.
(g)
+ Accoun + Office + Office + Building = Accoun + Notes +

ts
ts
Receiva
Suppl
Equipm
Payabl
Payable
ble
ies
ent
e
+
$3,00
0
$3,00
0
______
Owners Equity
Judith
Grimm,
Capital
+
$55,00
0
_______
+
$120,0
00
$120,0
00
________
+
$110,0
00
$110,0
00
________
$120,0
00
________
$110,0
00
________
$55,00
0
_______
$110,0
00
________
$55,00
0
1,500
$53,50
0
+
3,000
+$2,0
00
$5,00
0
+
9,000
$14,0
00
+
3,200
$2,00
0
______
$17,2
00
_______
$120,0
00
________
+
$5,20
0
$5,20
0
______
$2,00
0
______
$17,2
00
_______
$120,0
00
________
$5,20
0
______
$110,0
00
________
$2,00
0
______
$17,2
00
_______
$120,0
00
________
$5,20
0
______
$110,0
00
________
Explanation of Changes
Investment
$55,00
0
_______
$56,50
0
+
Advertising Expense
Consulting
Revenue
Services
Consulting
Services
55
55
Bal
.
(h)
Bal
.
(i)*
Bal
.
(j)
Bal
.
(k)
Bal
.
(l)
Bal
.
5,400
$34,9 $3,00 $2,00
00
0
0
______ ______
2,750
$32,1 $3,00 $2,00
50
0
0
______ ______ ______
$32,1 $3,00 $2,00
50
0
0
+
______
1,200 1,200
$33,3 $1,80 $2,00
50
0
0
______ ______
900
$32,4 $1,80 $2,00
50
0
0
______ ______
1,900
$30,5 + $1,80 + $2,00 +
50
0
0
488
$17,2
00
_______
$120,0
00
________
$5,20
0
______
$110,0
00
________
$17,2
00
_______
$17,2
00
_______
$120,0
00
________
$120,0
00
________
$5,20
0
______
$5,20
0
______
$110,0
00
________
$110,0
00
________
5,400
$61,90
0
2,750
$59,15
0
_______
$59,15
0
_______
$17,2
00
_______
$120,0
00
________
$110,0
00
________
$59,15
0
_______
$17,2
00
_______
$120,0
00
________
$5,20
0
900
$4,30
0
______
$59,15
0
1,900
$17,2 + $120,0 = $4,30 + $110,0 + $57,25
00
00
0
00
0
$171,550
$110,0
00
________
$171,550
Note: For (i), since no exchange has occurred, no entry is required.
Revenue
Withdrawal
Wages Expense
489

Part 3
Income Statement
Revenues:
Consulting services revenue
$8,400
Operating expenses:
Wages expense
$1,900
Advertising expense
1,500
3,40
0
Net income
$5,0
00
Judith Grimm, capital, January 1
Net income
$55,000
5,00
0
Total

60,00
0
$60,000
2,750
489
490
Judith Grimm, capital, December 31
$57,2
50
Balance Sheet
December 31, 2011
Assets
Cash
Liabilities
$
30,55
0
Accounts 1,800
receivable
Office supplies
2,000
Office equipment
17,20
0
Building
120,0
00
Accounts payable
Notes payable
Total liabilities
$171,
550
110,00
0
$114,3
00
Owners Equity
Judith Grimm, capital
Total assets
$
4,300
Total
liabilities
owners equity

57,250
and $171,5
50
490
491

Analysis component:
Assets result from a combination of debt and equity financing (A = L +
E). Southwests total assets of $171,550 resulted from incurring
$114,300 in liabilities ($4,300 in accounts payable plus $110,000 of
notes payable). $114,300/$171,550 x 100 = 66.628% or 67%. The
remaining 33% of the assets were financed by equity transactions
(owner investment and net income less withdrawals made by the
owner).

491

58
Edition
492
Cash
Jun
e
1
1
4
6
8
1
4
1
6
2
0
2
1
Liabili
Owners
Assets
= ties
+ Equity
Accoun
Clean
Accou
Andrew
+
ts
+ ing
= nts
+ Martin,
Receiv
Suppl
Payabl
Capital
able
ies
e
+
$120,0
00
4,500
2,400
+
$120,0
00
4,500
Investment
2,250
+
750
+
5,300
1,900
Advertising
Expense
Service
Revenue
Service
Revenue
Salaries
Expense
+
3,500
Service
Revenue
Rent Expense
+
$2,40
0
2,250
+
750
+
$5,300
1,900
+
5,300
Explanation of
Change
5,300
+
3,500

492
2
2
2
4
2
9
2
9
3
0
3
0
3
0
3
0
493
+
750
+
$750
+
825
3,500
+
3,500
375
120
525
1,900
2,000
$113,5 + $
80
+825
Service
Revenue
375
825 +
$117,555
$3,15 =
0
=

$375 +
120
525
1,900
2,000
$117,1
80
$117,555
493
Telephone
Expense
Utilities
Expense
Salaries
Expense
Withdrawal
494
Problem 2-6B (continued) Part 3

Income Statement
Revenues:
Maintenance services revenue .
Operating expenses:
Rent expense...........................
Net loss........................................
$10,375
$4,500
3,800
2,250
525
120
11,195
$ 820

Andrew Martin, capital, June 1......
Add: Investments by owner...........
Total ........................................
Less: Withdrawals by owner.........
Net loss.............................
Total ........................................
Andrew Martin, capital, June 30. . . .
$
0
120,000
$120,000
$2,000
820
2,820
$117,180

Balance Sheet
June 30, 2011
Assets
Cash...................$113,580
375
Accounts receivable
Cleaning supplies
3,150
Liabilities
Accounts payable.......
825
Owners Equity
Andrew Martin, capital
117,180
Total assets.........$117,555

owners equity.........

494
495
.............$117,555

495
496

Analysis component:
99.7% of Universals total assets at June 30, 2011 were
$120,000 invested by the owner during the month less a
net loss of $820 less owner withdrawals of $2,000. The
0.319% or 0.3%).

496

June 3
0
July 1
Bal.
1
Bal.
1
Bal.
6
Bal.
8
Bal.
Bal.
Bal.
1
0
1
5
497
Asset
= Liabilit + Owners Equity
s
ies
Accoun
Office
Offic
Excav
Accoun
Explanation
+
+
+
+
=
+ Robert
ts
e
at.
ts
Cantu,
Cash
Receiva
Suppl
Equi
Equip
Payabl
Capital
of Change
ble
ies
p.
.
e
$ + $2,300 + $780 +$4,80 + $17,0 = $3,100 +
$27,780
6,000
0
00
60,000
60,000 Investment
$66,00
$87,780
0
500 Rent Expense

500
$65,50
$87,280
0
+
+ 3,200
_______
800
4,000
$64,70
$21,0
$6,300
$87,280
0
00
+
______
______
_______
500
500
$64,20
$1,28
$21,0
$6,300
$87,280
0
0
00
+
_____
______
______
2,200
Earned
$66,40
$1,28
$21,0
$6,300
$89,480
0
0
00
______
_____
+
______
+
_______
3,800
3,800
$66,40
$1,28
$8,60
$21,0
$10,10
$89,480
0
0
0
00
0
______
+ 2,400
_____
______
______
______
Earned
$66,40
$4,700
$1,28
$8,60
$21,0
$10,10
$91,880
61
Bal.
1
7
0
______
______
$66,40
$4,700
0
2
______
3 3,800
Bal.
$62,60
$4,700
0
2
______ + 5,000
5
Bal.
$62,60
$9,700
0
2
+
2,400
8 2,400
Bal.
$65,00
$7,300
0
3
______
1 1,260
Bal.
$63,74
$7,300
0
3
______
1
260
Bal.
$63,48
$7,300
0
3
______
1 1,200
Bal.
$62,28 + $7,300 +
0
$8,60
0
______
$21,0
00
______
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
______
_______
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$96,880
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$3,20
0
______
$8,60
0
______
$21,0
00
______
$8,220
$3,20
0
+$8,60 +
0
$102,380
0
______
498
0
+
1,920
$3,20
0
______
00
______
0
+
1,920
$12,02
0
3,800
______
______
______
_______
$91,880
$91,880
+
5,000 Excavating
Earned
$96,880
1,260 Salaries Expense
$95,620
260 Utilities Expense
$95,360
$21,0 = $8,220 +
00
Fees
1,200 Withdrawal
$94,160
$102,380

Analysis component:
The revenue recognition principle states that transactions
are to be recorded when they occur when an economic
transaction takes place regardless of whether or not cash
has been received or paid. On July 15, there is an economic
exchange because even though Cantu Excavating did not
collect cash from the customer for work performed, Cantu did
receive a promise from the customer saying that the
customer would pay Cantu at a future date thus creating an
asset, an account receivable. Therefore an economic
exchange occurred the customer received a service and
Cantu received an asset called accounts receivable.
Problem 2-8B
CANTU EXCAVATING
Income Statement
Revenues:
Excavating fees earned .........
Operating expenses:
Salaries expense...................
Rent expense........................
Utilities expense ...................
Net income................................
$9,600
$1,260
500
260
2,020
$7,580
CANTU EXCAVATING
Robert Cantu, capital, June 30. . . .
Add: Investments by owner........
Net income...........................
Total.......................................
Less: Withdrawals by owner.......
Robert Cantu, capital, July 31......
$ 27,780
$60,000
7,580

67,580
$95,360
1,200
$94,160
499

CANTU EXCAVATING
Balance Sheet
July 31, 2011
Assets
Cash........................
$62,280
Accounts receivable
7,300
Office supplies.........
3,200
8,600
Excavating equipment
.................... 94,160
Liabilities
Accounts payable....... $ 8,220
Owners Equity
21,000Robert Cantu, capital
$102,380
owners equity....... $102,380
Analysis component:
The owner of Cantu Excavating invested $60,000 during the
month ended July 31, 2011 therefore having a positive impact
on equity. Equity increased during July largely because of
this additional investment by the owner. As a sole
proprietor, a goal is to increase equity because of positive
earnings; not through owner investment.
Owner invests cash.......
Balance
Sheet
Total Tot
Asset
al
s
Lia
b.
+
Inco
me
Stmn
t
Net
Equi Inco
ty
me
+

500
1
Pay wages with cash.....
2
Acquire services on
3 credit...........................
Buy store equipment for
4 cash.............................
5 payable........................
Sell services for cash....
6
Sell services on credit...
7
Pay rent with cash........
8
Owner withdraws cash. .
9
1 Collect receivable from
0
(7)...........................
+
+/
+
+/

501
ANALYTICAL AND REVIEW PROBLEMS

A&R Problem 2-1
TASKER AUTO REPAIR SHOP
Balance Sheet
November 30, 2011
Assets
Cash........................
Liabilities
$
6,300
Accounts payable...
$34,650
Accounts
47,25
receivable...............
0
Mortgage payable. .
28,350
Parts and supplies... 14,17

5
Total liabilities.....
$63,000
Equipment............... 22,05
0
Owners Equity
Jack Tasker, capital
26,775

Total assets............. $89,7
75
owners equity....
$89,775
Note to Instructors:
To reinforce students understanding of the nature of doubleentry bookkeeping and the accounting equation, it may be
advantageous to use this problem to demonstrate the
importance of recording transactions correctly because
neither double-entry bookkeeping nor the accounting
equation guarantee the correctness of information; they only
prove arithmetic accuracy.
Accordingly, the best way to explain this seemingly
502
impossible situation to beginning students in accounting is to

summarize both incorrect and the correct balance sheets in
detail.

503
A&R Problem 2-2

SUSAN HUANG, LAWYER
Income Statement
Revenues
Legal fees................................
$11,550
Operating expenses
Salaries expense...................... $2,940
Rent expense........................... 2,100
Supplies expense.....................
420
210
5,670
Net income...................................
$ 5,880
SUSAN HUANG, LAWYER
Susan Huang, capital, October 1. . .
$
0
Add:.............................................Investment by owner
$10,500
Net income............................. 5,880
Total.........................................
16,380
Susan Huang capital, October 31...
$16,380
SUSAN HUANG, LAWYER
Balance Sheet
October 31, 2011
Assets
Cash................... $
...............$ 1,050
Accounts receivable
Supplies..............
Law library..........
Furniture.............
............... 16,380
3,780
Liabilities
Accounts payable
2,100
1,050
8,400
2,100
Total assets......... $17,430
Owners Equity
Susan Huang, capital
owners equity.$17,430

504

505
A&R Problem 2-3
Income Statement
Revenues Expense
s
1.
$14,
000
Balance Sheet
Assets
$14,
000
2.
$5,
000
3.
$25,
000
4.
5.
Liabilities
$
500
$14,
000
$25,
000
5
00
5
00
Owners
Equity
5
00
500
6.
10,0
00
10,0
00
7.
5,00
0
5,0
00

506
8.
20
0
9.
2,0
00
1
0.
12,
000
45
1
1.
1
2.
2
00
900
45
45
9
00
900

507
Ethics Challenge
1. The accounting principle most relevant to this situation
is the revenue recognition principle.
The revenue
recognition principle provides guidance on when
revenue should be recognized on the income
statement. The principle states that revenue should be
recognized when earned. In this case, the earliest the
revenue could be considered earned is when the
product is shipped to customers.
2. If Sue is aware of the revenue recognition principle she
faces a dilemma of applying GAAP, which will result in
different revenue recognition than her supervisor is
advocating.
Sue faces a dilemma of following the
guidance of her profession or following her supervisor.
If Sue does not conform to her supervisors wishes she
may face the consequence of losing her job. If Sue
does what her supervisor requests she may face
internal anguish of doing something that she knows is
not professionally correct and which may negatively
affect any users of the financial statements that she is
helping produce.
3. Students
should
support
their
decision
with
appropriate reasons likely echoing the discussion in 2)
above.
4. Sue may be able to discuss the situation she is facing
with someone else in the firm and find support for not
following the supervisors directive. If the intent to
violate accounting principles is a commonplace
occurrence in the skateboard company Sue may wish to
seek employment elsewhere as the problem will likely
reoccur in the future.

508

68
Edition
FFS 2-1
Parts 1 and 2
June 2011
Assets
June 1
5
7
9
15
17
+ Account +
s
Cash
Receiva
ble
+20,0
00
+3,000
-1,500
+1,00
-1,000
0
-5,000
+2,00
0
= Liabiliti + Owners
Equ
ity
Office = Accoun +
Diane
ts
Towbell,
Equip.
Payabl
Capital
e
+6,000
+26,000
Explanation of
Change
in Owners
Equity
Owner
investment
-1,500 Rent expense
29
30 -1,500
Totals 15,00 +
0
+300
2,000 +
6,000 =
23,000
300 +
-300 Utilities
expense
22,700
23,000
509

510
511

FFS 2-1 (continued) Parts 1 and 2

July 2011
Assets
Liabiliti + Owners
Equi
ty
Diane
Explanation of
+ Accoun + Office = Accou +
ts
nts
Towbell,
Change
Cash
Receiv
Equip.
Payabl
Capital
in Owners
able
e
Equity
Balance 15,0
2,000
6,000
300
22,700
June 30
00
July 5
+3,500
8 +2,0
-2,000
00
9
-1,500 Rent expense
1,50
0
12
+1,800
+1,80
0
14
-1,000
1,00
0
15
2,50
0
17 +4,8
00
69
512
25 -600
1,70
0
31
2,00
0
Totals 12,5 +
00
-300
-300
31
-1,700
-2,000
3,500 +
23,800
7,800 =
800 +
23,000
23,800
Utilities
expense
Wages expense
Owner
withdrawals
513
FFS 2-1 (continued)

Part 3
GLENROSE SERVICING
Income Statement
Revenues:
Service revenue.....................
$5,000
Operating expenses:
Wages expense..................... $6,500
Rent expense........................
1,500
300
Net loss.....................................
$3,300
8,300
GLENROSE SERVICING
Diane Towbell, capital, June 1..
26,000
Total ..................................
Net loss ........................
Diane Towbell, capital, June 30
-0-
$26,000
$ -03,300
3,300
$22,700
GLENROSE SERVICING
Balance Sheet
June 30, 2011
Assets Liabilities
Cash..........................$15,000
Total assets...............$23,000
300
Owners Equity
.................. 22,700
514
515
FFS 2-1 (continued) Part 3

GLENROSE SERVICING
Income Statement
Revenues:
Service revenue.....................
$8,300
Operating expenses:
Wages expense..................... $4,200
Rent expense........................
1,500
300
6,000
Net income................................
$2,300
GLENROSE SERVICING
Diane Towbell, capital, July 1...
Net income......................
Total ..................................
Diane Towbell, capital, July 31.
2,300
$22,700
$
-02,300
$25,000
2,000
$23,000
GLENROSE SERVICING
Balance Sheet
July 31, 2011
Assets Liabilities
Cash..........................$12,500
Total assets...............$23,800
800
Owners Equity
.............
23,000

515
516
FFS 2-1 (concluded)

Analysis component:
4. The increase in assets of $800 from June 30, 2011 to July
31, 2011 was financed by a $500 increase in liabilities
and a $300 increase in equity. The $300 increase in
equity resulted from a net income of $2,300 less
withdrawals of $2,000.
5. a. The income statement reports a companys financial
performance. A companys financial performance is how
a company performs or operates on a day-by-day basis:
the generation of revenues and incurring of expenses
that help create the revenues.
b. The balance sheet reports a companys financial
position at a specific point in
time. Financial position describes what assets,
liabilities, and equity a company has on a given date.
For example, Glenrose Servicings cash balance on July
31, 2011 is $12,500 this describes how much cash
Glenrose had on July 31.
6. Glenroses July 31, 2011 income statement reports a net income
of $2,300 which is reported on the July statement of owners
equity as one of the activities that caused equity to change
during the month. The ending capital balance reported on the
July statement of owners equity is reported on the July balance
sheet as the equity position on July 31, 2011.
FFS 2-2
Part A
9. WestJets assets are reported at cost in accordance with
the Cost Principle.
10.
WestJet rounds to thousands of Canadian dollars on
its financial statements.
11.
Assets = Liabilities + Equity; $2,213,092,000 =
$1,542,939,000 + $670,153.
12.
No, the personal assets belonging to the owners of
WestJet are not included on WestJets financial
statements in accordance with the Business Entity
Principle.
516
517
13.
(variety of answers possible, for example, the
accounts receivable manager would want to know if
receivables are being collected efficiently)
Part B
14.
a. Total assets = $83,365,000;
b. Total net assets = $83,365,000 - $28,428,000 =
$54,937,000;
c. Assets = Liabilities + Equity; $83,365,000 =
$28,428,000 + $54,937,000.
15.
Data is provided on a comparative basis so decision
makers can see the change from the previous year(s).
16.
(variety of answers possible, for example, a
potential creditor would be interested in knowing if
Danier will have sufficient assets to cover any credit
they grant)

517
518
CT 2-1
Note to instructor: Student responses will vary therefore the
answer here is only suggested and not inclusive of all
possibilities; it is presented in point form for brevity.
Goal(s)*:
Correctly state sales reports*
Problem(s):
Misclassification of items under GAAP
Assumption(s)/Principle(s):
The report should be prepared in accordance with GAAP to
protect users of the information so that users know on what
basis amounts have been recorded/reported.
Facts:
as shown in the September sales report prepared by the sales
person
Conclusion(s)/Consequence(s):
August 28 sale should be in August and not in September;
consequence of current reporting is that August revenue, net income,
and equity was understated and September revenue, net income,
and equity are overstated
September 10 purchase of desk is to be recorded as an asset and
not expensed; consequence of current reporting is that September
expenses will be overstated causing net income, assets, and equity
to be understated.
September 230 lunch costs should have been expensed;
518
519
consequence of current reporting is that statements wont balance (it

appears there are two credit entries with no debit) and that expenses
are understated with net income and equity overstated.
October 5 appears to be recorded correctly.
*This should be the goal since it is assumed that the owner(s) of the
business want accurate reports. However, the salesperson might
want to overstate the sales to make himself/herself look good; the
marketing manager might want to overstate sales for the same
reason. The goal is highly dependent on perspective.

and
QUESTIONS
EXERCISES
m)
$80,000 $65,000 = $15,000 net income
n) $92,000 $149,000 = $57,000 net loss

o) $10,000 + 0 0 + x = $86,000
x = $86,000 $10,000
x = $76,000 net income
p) $25,000 + $40,000 0 + x = $52,000

x = 52,000 25,000 40,000
x = $13,000 or a $13,000 Net loss

519
520
(a)
Answers
Proofs:
Owners equity,
January 1..........................
(b)
(c)
(d)
(e)
$) $36,00 $12,00 $21,50 $92,00

(24,750
0
0
0
0
$
0
$
0
$
0
$ $92,00
0
0
Owners investments
the year............................
60,000 36,000 31,500 37,000 150,00

0
15,75
0
40,50
0
(4,50) 21,500
0
(8,000)
Owners withdrawals
during the year ........ (24,750) (27,00) (15,00) (15,75) (63,00)
0
0
0
0
Owners equity,
$51,000 $49,50 $12,00 $42,75 $171,0
December 31....................
0
0
0
00

520
521

THE DOBBS GROUP
Income Statement
Revenues:
Operating expenses:
Rent expense........................
2,550
1,680
660
Net income................................
$18,000
10,890
$ 7,110

THE DOBBS GROUP
Net income......................
7,110
Total ..................................
$
0
84,000
91,110
$91,110
3,360
$87,750
Analysis component:

$7,110).
$87,750.

521
522

THE DOBBS GROUP
Balance Sheet
November 30, 2011
Assets Liabilities
Cash..........................$12,000
Automobiles............... 36,000
Total assets...............$95,250

Owners Equity
Analysis component:

of The Dobbs Group.
Income Statement
Revenues:
Total revenues....................
Operating expenses:
1,540
580
Net loss.....................................

$4,200
300
$ 4,500
4,620
$
120
522
523

Total ..................................
Net loss.........................
120
$ 7,400
1,200
$ 8,600
1,120
$ 7,480
Analysis component:
$80.
Balance Sheet
July 31, 2011
Assets Liabilities
Cash..........................$ 1,600
1,400
Supplies.....................
600
Furniture................... 1,800
...............
7,480
Owners Equity

523
524
Total assets........................
2,200
$8,880
$8,880
Analysis component:

524
525
Description

imagination.
a.
Assets Liabilities=
Owners
Equity
$60,000
=
........................$90,000
End of the year.............$240,000$92,000 = 148,000
Net income..................................................... $58,000

Net income....................................$100,000
42,000
$90,000 + x - $42,000 = $148,000; x = $100,000
Net loss......................................... $ 7,000
$90,000 + $65,000 + x = $148,000; x = ($7,000) where the
525
526

Net income.................................... $50,000
42,000
$90,000 + $50,000 - $42,000 + x = $148,000; x = $50,000
a.
$20,000 + $5,000 = $25,000 Assets at August 1, 2011.
$24,000
b.
$16,000
Assets
Cash
a)
Total
s
Liabilities +
Owners
Equity
Accounts
Receivab
Office
Accounts
Noel Bridges,
+
le
Capital
+
$2,500
+ $2,500
2,500
2,500

526
527
b)
Total
s
c)
Total
s
2,500
+
+ $200
+ $200
200
200
600
2,500
+
600
3,100
200
200
3,100
3,100
200
200
3,100
d)*
Total
s
e)
Total
s
1,500
1,600
f)
Total
s
1,500
200
200
+
$1,250
$1,600
$1,250
$3,050
1,600
+ 1,250
$200
$200
$2,850
$3,050

required.

527
528

Assets
Cash
Liabilitie +
s
Owners
Equity
Accounts
Parts
Receivabl
Supplie
Equipme
Accounts
+
e
+
s
+
nt
= Payable +
Janine
Commry,
Capital
a)
+ $7,000
+ $ 7,000
b)
- 2,500
- 2,500
Totals
$4,500
$ 4,500
c)
Totals
$4,500
d)
Totals
e)
Totals
+ $1,200
+ $1,200
$1,200
$1,200
+ $3,400
$4,500
$3,400
+ $ 3,400
$1,200
$ 950
$3,550
$ 4,500
$1,200
$7,900
$1,200
$7,900
$1,200
$ 7,900
+ $950
$3,400
$1,200
$950
f)*
Totals
g)
Totals
h)
Totals
i)
Totals
$3,550
$3,400
$1,200
$950
$1,200
$2,350
$1,200
$3,400
$1,200
$950
+ $1,400
$3,750
+ $ 1,400
$3,400
$1,200
$950
$2,700
$1,050
$7,900
$9,300
$ 2,700
$3,400
$1,200
$6,600
$950
$6,600
$6,600

required.

528
529

b.
c.
d.
e.
f.
g.


529
530

y) The business purchased land paying $3,000.
z) $400 of office supplies were purchased on credit (or on
account).
aa)
Paid $700 for the purchase of office supplies
bb)
$1,050 of revenue on account (or on credit) was earned.
cc)
Collected $1,000 cash for revenue performed.
dd)
ee)
Collected $1,050 from a credit customer.
ff) The owner invested $5,000 of land.
Explanation
Payable
Capital of Change
a. $25,000
$5,000
b. 1,300
Expense
$23,700
$5,000
c.
$23,700
d.
+6,000
+6,000
$11,000
$6,000
$11,000
$6,000
+$1,000
$1,000
f. 4,000
$20,200
h. +
250
Rent
$28,700
500
$11,000
Revenue
$29,200
+ 1,000
$6,000
$30,200
$6,000
$30,200
Revenue
+ 4,000
$1,000
$15,000
g. 1,200
Expense
$19,000
$1,300
$24,200
$24,200
Investment
$28,700
+ 500
e.
$30,000
1,200
$1,000
$15,000
$6,000
Wages
$29,000
250

530
531
$19,250
i.
$750
$15,000
$6,000
6,000
$13,250
j.
$29,000
6,000
$750
$15,000
$29,000
250
$13,000
$28,750
$750
$28,750
Revenue
($500 + $1,000)
$15,000
250
Withdrawal
$28,750
Expenses
=
Net loss
($1,300 + $1,200) =

$1,000
531
532

asset) for cash.
cash.
on credit.
receivable.
Assets
Cash
Liabiliti +
es

Receivab s
nt
s
Deweer
n
le
Payable
d,
Capital
a)
b)
Total
s
d)
Owner
+$2,500 Investment
+ $2,500
+ $4,000
$4,000
+$4,000 Revenue
$
c)
Total
s
Owners Equity
$2,500
+ $150
$4,000
$150
$6,500
+ $150
$2,500
$150
$ 450

$6,500
$ 450 Sal.
Expense
532
533
Total
s
$3,550
$150
$2,500
$150
$6,050
$3,550
$150
$2,500
$150
$6,050
e)*
Total
s
f)
Total
s
$
1,400
$2,150
g)
Total
s
$ 1,400 Rent
Expense
$
$150
$2,500
$150
+ $2,000
$2,150
$2,000
$6,800
$4,650
+$2,000 Revenue
$150
$2,500
$150
$6,650
$6,800

required.

533
534

Income Statement
Revenues:
$6,000
Operating expenses:
Salaries expense
Rent expense
450
1,40
0
1,85
0
Net income
$4,1
50


Add:
Investment by owner
Net income
$2,500
4,15
0

6,65
0
534
535
$6,6
50

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$2,1
50
Accounts payable
$
150
Accounts 2,00
receivable
0
Supplies
Equipment
150
2,50
0
Owners Equity
Total assets
$6,8
00
6,65
0

equity
00

535
536

Analysis component:
j. Supplies of $150 were financed by accounts payable, a liability.
k. Equipment of $2,500 was financed by owner investment, an
equity transaction.
l. Cash of $2,150 and Accounts receivable of $2,000 were
Assets
Cash
a)
+
$500
+$400
$500
Owner
+$15,500 Investment
+$15,000
c)
Total
s
Owners Equity

Explanatio
Receivab s
nt
s
Jong,
n
le
Payable
Capital
b)
Total
s
Liabiliti +
es
$400
+$400
$15,000
+$600
$400
$15,500
+$600
$500
$1,000
$15,000
$1,000
$15,500
$500
$1,000
$15,000
$1,000
$15,500
d)*
Total
s
e)
Total
s
+$550
$500
f)
Total
s
$550
+$550 Revenue
$1,000
$15,000
$1,000
+$600
$500
$1,150
$16,050
+$600 Revenue
$1,000
$15,000
$1,000

$16,650
536
537
g)
-$200
Total
s
$300
h)
-$250
Total
s
$50
-$200
$1,150
$1,000
$15,000
$800
$16,650
-$250 Adv.
Expense
$1,150
$1,000
$17,200
$15,000
$800
$16,400
$17,200

required.

537
538

Petes Yard Care
Income Statement
Revenues:
Yard care revenue
$1,150
Operating expenses:
Advertising expense
250
Net income
$
900
Petes Yard Care

Add:
Investment by owner
$15,500
Net income
900
16,40
0
$16,4
00
Petes Yard Care

Balance Sheet
March 31, 2011
Assets
Cash
Liabilities
$
50
Accounts payable

538
539
800
Accounts 1,150
receivable
Supplies
Equipment
1,000
15,000
Owners Equity
Pete Jong, capital
16,40
0

Total assets
$17,20
0
owners equity
$17,2
00
Analysis component:

539
540

Assets
Cash
Bal.
$1,200
+$1,000
-$1,000
Total
s
$5,000
$200
b)
-$2,000
Total
s
$3,000
c)
+$700
Total
s
$3,700
d)
-$500
Total
s
$3,200
e)
-$1,200
Total
s
$2,000
f)
-$600
Total
s
$1,400
g)
Total
s
Owners Equity

Otto
Receivab s
nt
s
Ingles,
le
Payable
Capital
$4,000
a)
Liabiliti +
es
$900
$7,500
$4,000
$9,600
$900
$7,500
$4,000
$9,600
-$2,000
$200
$900
$7,500
$2,000
$9,600
+$700 Revenue
$200
$900
$7,500
$2,000
$10,300
-$500 Wage
Exp.
$200
$900
$7,500
$2,000
$9,800
-$1,200 Rent Exp.
$200
$900
$7,500
$2,000
$8,600
-$600 Utilities
Exp.
$200
$900
$7,500
$2,000
+$400
$1,400
Explanati
on
$600
$8,000
+$400 Revenue
$900
$7,500
$2,000
$8,400
h)*
540
541
Total
s
$1,400
$600
$900
$10,400
$7,500
$2,000
$8,400
$10,400

required.

541
542

Income Statement
Revenues:
Wrecking revenue
$1,100
Operating expenses:
Rent expense
$ 1,200
Wages expense
500
Utilities expense
600

Net loss
2,30
0
$1,2
00

$ 9,600
Less: Net loss
1,200
$
8,400

Balance Sheet
July 31, 2011
542
543
Assets
Cash
Accounts
receivable
Supplies
Equipment
Liabilities
$1,400
Accounts payable
$
2,000
600
900
7,500
Owners Equity
8,400

Total assets
$10,40
0
owners equity
$10,4
00
Analysis component:
$8,400 or 80.77% (calculated as $8,400/$10,400 100) of the assets are
financed by Otto Ingles, the owner. $2,000 or 19.23% (calculated as
$2,000/$10,400 100) of the assets are financed by debt.
Chapter 3

Transactions
EXERCISES

543
544
Cash
Accounts Payable
(a)
25,500
750 (b)
(d)
3,000
14,10 (e)
0
(h)
(e)
14,100 (c)
0 Balance
2,250 1,05 (g)

0
Ella Tims, Capital
2,000 (i)
Balance
14,100
12,850
25,500 (a)
25,500 Balance
Accounts Receivable
(f)
5,400
Balance
3,150
2,250 (h)
(i)
2,000
Balance
2,000
Office Supplies
(b)
750
Balance
750
Fees Earned
3,000 (d)
5,400 (f)
Office Equipment
(c)
14,100
Balance
14,100
8,400 Balance
Rent Expense
(g)
1,050
Balance
1,050

544
545

Neil Simon, Capital
Cash
Jan.
31
Feb.
700
4,000
Feb.
14
2,800
60
23
2,400
1,000
25
800
26
800 Jan. 31
800 Bal.
2
20
Bal.
40
Accounts Receivable
Jan.
31
Feb.
1,200
2,40
0
Feb.
20
Jan.
31
Feb.
25
Bal.
-01,000
1,000
15,000
12
18
Bal.
1,90
0
Service Revenue
15,700
2,600 Jan. 31
2,800 Feb. 2
Prepaid Insurance

15,000
12
545
546
Jan.
31
Feb.
-0-
1,900
4,000
18
22,300 Bal.
14
Bal.
4,000
Wages Expense
Computer Equipment
Jan.
31
Feb.
480
7,600
Jan. 31
1,080
Feb. 26
800
Bal.
1,880
10
Bal.
8,080
Accounts Payable
Feb.
60
60 Jan. 31
NOTE:
There
is
no
entry
to be recorded
23
for February 21.
-0- Bal.
Notes Payable
-0- Jan. 31
7,600 Feb.
10
7,600 Bal.
Analysis component:

546
547

Cash
Mar.
31
Apr.
2
19
Bal.
1,800
400 Apr.
780
300
10
15
2,000
1,000
29
Mar.
31
Apr.
29
Bal.
500
1,000
1,500
2,880
Repair Revenue
14,000 Mar.
Accounts Receivable
Mar.
31
Apr.
18
4,800
Bal.
4,000
31
2,000 Apr.
780 Apr. 2
19
1,200
1,200
18
15,980 Bal.
Repair Supplies
Mar.
31
Apr.
9
1,400
Bal.
2,290
Rent Expense
Mar.
31
Apr.
25
Bal.
890
950
250
1,200
Equipment
Mar.
31
Apr.
15
Bal.
7,400
300
7,700
Accounts Payable
Apr.
10
400
500 Mar.
31

547
548
890 Apr.
250
9
25
1,240 Bal.
2,350 Mar.
31
2,350 Bal.

548
549

2.
GENERAL JOURNAL
Account Titles and
PR
Explanations
Dat
e
201
1
Jul
Cash..............................
y
1
by owner.
Debit
101
5,000
301
1 Equipment.....................
0
Purchased equipment
on credit.
150
1 Cash..............................
2
Revenue...................
cash.
101
1 Expenses.......................
4
Cash.........................
Paid expenses.
501

5
Revenue...................
account.
106

1
302
Page 1
Credit
5,000
2,500
201
2,500
10,000
401
10,000
3,500
101
3,500
1,500
401

1,500
250
549
550
Cash.........................
101

250
550
551

solution.
1 and 3.
Cash
July 1
12
Balance
101
5,000
10,000
3,500 July 14
250
31
11,250
Accts. Receivable
July
15
106
1,500
Equipment
July 10
150
2,500
Accounts Payable
201
2,500
Sue Ware,
Capital
5,000
July 10
301
July 1

551
552
Sue Ware,
Withdrawals
July 31
302
250
Revenue
401
10,000
1,500
11,500
July 12
15
Balance
Expenses
501
July 14
3,500

552
553

1 and 3.
Account No. 101
Cash
Date
Explanation
PR
Debit
Credit
Balance
2011
July
G1
5,000
5,000
12
G1
10,000
15,000
14
G1
3,500
11,500
31
G1
250
11,250
Account No. 106
Accounts Receivable
Date
Explanation
PR
Debit
Credit
Balance
2011
July 15
G1
1,500
Account No. 150
Equipment
Date
Explanation
1,500
PR
Debit
Credit
Balance
2011
July 10
G1
2,500
Account No. 201
Accounts Payable
Date
Explanation
2,500
PR
Debit
Credit
Balance
2011
July 10
G1
2,500
Account No. 301
Sue Ware, Capital
Date
Explanation
2,500
PR
Debit

Credit
Balance
553
554
2011
July
G1
5,000
Account No. 302
Date
Explanation
5,000
PR
Debit
Credit
Balance
2011
July 31
G1
250
Account No. 401
Revenue
Date
Explanation
250
PR
Debit
Credit
Balance
2011
July 12
G1
10,000
10,000
15
G1
1,500
11,500
Account No. 501
Expenses
Date
Explanation
PR
Debit
Credit
Balance
2011
July 14
G1
3,500
3,500

4.
DelaWare
Trial Balance
July 31, 2011
Acct
. No.
Account Title
101Cash.........................
150Equipment................
Credi
Debit
t
$11,
250
1,50
0
2,50
0

554
555
$
2,50
0
5,00
0

401Revenue...................
501Expenses..................
Totals...........................
5.
250
11,5
00
3,
500
$19,
000
$19,
000
DelaWare
Income Statement
Revenue................................
$11,
500
3,
500
$8,0
00
Expenses...............................
Net income............................
DelaWare
Net income......................
Total...................................
$5,0
00
8,0
00
$
0
13,
000
13,0
00

250
555
556
$12,
750

556
557

5. (concluded)
DelaWare
Balance Sheet
July 31, 2011
Assets
Liabilities
Cash..................................
$11,25
0
1,500
Equipment.........................
2,500
$
2,500
Owners Equity
Sue Ware, capital.....................
12,75
0

Total assets.......................
$15,25
0
owners equity......................
$15,25
0
Analysis component:
transaction.
Account
Number
Account Name
110
Cash

557
558
115
Accounts Receivable
160
Office Equipment
210
Accounts Payable
215
Unearned Revenue
310
Wes Bosse, Capital
320
410
Consulting Revenues
510
Salaries Expense
520
Rent Expense
530
Utilities Expense

558

559

2.
Cash
Bal
Feb
1
10
Bal
11
Accounts
0
Receivable
11,5 2,00 Feb Bal 6,00
00
0
5
0
8,50 500
17
0
2,50 10,0
28
0
00
10,0
00
Unearned
21
Revenue
5
500 Bal
Wes Bosse,
Capital
9,50
0
11
5
31
0
Bal
2,50 Feb
0 10
3,00 Bal
0
Salaries
Expense
Bal
10,0
00
Feb
10,0
28
00
Bal
20,0
00
51
0
Rent
Expense
Bal 7,50
0
52
0
Office Equipment 16
0
Bal
12,5
00
Wes Bosse,
Withdrawals
Bal
2,00
0
Feb
500
17
Bal
2,50
0
32
0
Utilities
Expense
Bal
1,00
0
53
0
Accounts
21
Payable
0
Feb 2,00 3,00 Bal
5
0
0
1,00 Bal
0
Consulting
Revenues
37,5
00
8,50
0
46,0
00
41
0
Bal
Feb
1
Bal
91
560
561

1.
Dat
e
201
1
Fe
b.
1
General Journal
Account Titles and
PR
Explanations
Cash.............................
Consulting
Revenues.....................
Performed work for
cash.
Cash.......................
Paid account.
1
0
Cash.............................
Unearned Revenue. .
Received cash in
advance.
1
2
No entry.
1
7
Wes Bosse,
Withdrawals.................
Cash.......................
2
8
Cash.......................
Paid salaries.
Debit
10
1
41
0
8,500
21
0
10
1
2,000
10
1
21
5
2,500
32
0
10
1
500
51
0
10
1
10,000
Page G1
Credit
8,500
2,000
2,500
500
10,000
3.

561
562
Bosse Advisors
Trial Balance
February 28, 2011
Acct.
No.
Account Title
Debit
Credit
101 Cash.....................................
$
10,000
6,000
$
1,000
3,000
9,500
2,500
46,00
0
520 Rent expense.......................
7,500
1,00
0
Totals................................... $59,50 $59,5
0
00

562
563

4.
Assets
Cash..................
Accounts
Office
Bosse Advisers
Balance Sheet
February 28, 2011
Liabilities
$10,00
0
6,000
Unearned revenue...
12,50
0
Owners Equity
$28,50
0

owners equity.....
$
1,000
3,00
0
$
4,000
24,500
$28,50
0
Capital = 9,500
Opening Balance
+ 46,000 Revenues
2,500 Withdrawals
Analysis component:

563
564

a.
Cash.......................................................................
7,000
Equipment.............................................................
5,600
Automobiles...........................................................
11,000

23,600
the business.
Cash................................................................
3,600
3,600
600
Cash................................................................
600
200
Equipment.............................................................
9,400
9,600
e. Cash.................................................
2,500
2,500
Cash................................................................
2,400
2,400

Cash................................................................
700
700

564
565

2011
April Cash..................................................................
5
1,500
1,500
8 Supplies........................................
3,000
3,000
57,000
Cash............................................................
57,000
Paid salaries.
3,000
Cash............................................................
3,000
21 No entry.
9,000
9,000

$1,500 x 6 = $9,000
29 Cash..................................................................
3,000
3,000
565
566
Cash............................................................
1,800
1,800

566
567

2,700
c. Cash..................................................
3,150
2,700
3,150

in the company.
to the client.
same amount.
Cash............................................
1,125
Cash............................................
930
1,125
930

567
568

customers.

568
569

Parts a and b:
Account No. 101
Cash
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
850
2011
Jan.
G1
3,500
2
0
G1
3
1
G1
3
1
G1
3,000
4,350
3
1
G1
750
3,600
2,000
5,000
Explanation
2,350
7,350
Account No. 106
Accounts Receivable
Date
4,350
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
300
2011
Jan.
1
2
G1
3
1
G1
9,000

9,300
5,000
4,300
569
570
Account No. 167
Equipment
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,500
2011
Jan.
2
0
G1
12,000
Account No. 201
Accounts Payable
Date
Explanation
13,500
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
325
2011
Jan.
2
0
G1
10,000
Account No. 301
Jay Walker, Capital
Date
Explanation
10,325
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
2,325
2011
Jan.
G1

3,500
5,825
570
571

Account No. 302
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
300
2011
Jan.
3
1
G1
750
Fees Earned
Date
Explanation
1,050
Account No. 401

PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,800
2011
Jan.
1
2
G1
9,000
Salaries Expense
Date
Explanation
10,800
Account No. 622

PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,500
2011
Jan.
3
1
G1
3,000

4,500
571
572

General Journal
Date
Page 1
Debit
Credit
2011
Jan. 1 Cash..................................................................
10
1
30
1
3,500
3,500

10
6
Fees Earned................................................
40
1
9,000
9,000

20 Equipment.........................................................
16
7
12,000
Cash............................................................
10
1
2,000
20
1
10,000

balance on credit.
31 Cash..................................................................
10
1
10
6
5,000
5,000

62

3,000
572
573
2
Cash............................................................
10
1
3,000

30
2
Cash............................................................
10
1
750
750

Analysis component:

General Journal

Page
G1
573
574
Date
2011
Aug.
Account Titles and

Explanations
PR
Debit
Cash.........................................
10
1
15,000
16
7
17,000
30
1
Credit
32,000

1
Prepaid Rent......................................
13
1
Cash............................................
10
1
6,500
6,500

5
Office Supplies...................................
12
4
Cash............................................
10
1
1,800
1,800

20
Cash..................................................
10
1
40
1
9,200
9,200

31
69
0
Cash...................................
10
1
1,100
1,100

574
575

575
576

Cash
Date
Explanation
Account No. 101

PR
Debit
Credit
Balance
G1
15,000
G1
6,500
8,500
G1
1,800
6,700
2
0
G1
3
1
G1
2011
Aug.
9,200
Explanation
15,900
1,100
14,800
Account No. 124
Office Supplies
Date
15,000
PR
Debit
Credit
Balance
2011
Aug.
G1
1,800
Account No. 131
Prepaid Rent
Date
Explanation
1,800
PR
Debit
Credit
Balance
2011
Aug.
G1
6,500
Account No. 167
Date
Explanation
6,500
PR
Debit
G1
17,000
Credit
Balance
2011
Aug.

17,000
576
577
Account No. 301
Date
Explanation
PR
Debit
Credit
Balance
2011
Aug.
G1
32,000
Account No. 401
Date
Explanation
32,000
PR
Debit
Credit
Balance
2011
Aug.
2
0
G1
9,200
Utilities Expense
Date
Explanation
9,200
Account No. 690

PR
Debit
Credit
Balance
2011
Aug.
3
1
G1
1,100

1,100
577
578
THE PIXEL SHOP

Trial Balance
August 31, 2011
Acct
No.
Account Title
Debit Credit
101 Cash.................................. $ 14,800

124 Office supplies...................
1,800
131 Prepaid rent.......................
6,500
17,000
$32,000
9,200
1,100
Totals................................. $41,200
$41,200
Analysis component:


578
579

Cash
Aug.
1
20
Bal
Aug.
1
101
15,00 6,50 Aug. 1

0
0
9,200 1,80
5
0
1,10
31
0
14,80
0
Photography 16
Equipment 7
17,0
00
Photography Fees 40
Earned 1
9,2 Aug.
00 20
Office
Supplies
Aug. 1,80
5
0
124
Prepaid
Rent
Aug. 6,50
1
0
13
1

1
32,0 Aug.
00 1
Aug.
31
Utilities
Expense
1,10
0
690
THE PIXEL SHOP

Trial Balance
August 31, 2011
Acct.
No.
Account Title
Debit Credit
101
Cash...............................................
$ 14,800
124
Office supplies................................
1,800
131
Prepaid rent...................................
6,500
167
17,000
301

..........................................$32,000
401

..............................................9,200
690
1,100

579
580
Totals.............................................
$41,200
$41,200
Analysis component:

Hogans Consulting
Income Statement
Operating expenses:
Rent expense....................
$46,
000
$37,
000
14,0
00

Net loss.................................
51,0
00
$
5,00
0
Hogans Consulting
$
0

580
581
50,0
00
$50,
000
Total...................................
Net loss........................
$2,0
00
5,00
0

31.........................................
7,00
0
$43,
000
Hogans Consulting
Balance Sheet
December 31, 2011
Assets
Liabilities
Cash..................................
$12,00
0
8,300
Notes payable..........................
53,500
Prepaid rent.......................
5,000
$54,30
0
Equipment.........................
72,00
0
Owners Equity
800
43,000

Total assets.......................
$97,30
0
owners equity......................
$97,30
0
Analysis component:
581
582

JenCo
Income Statement
Revenues:
Service revenue...........................................................
$1,900
Operating expenses:
$
800
10
810
Net income........................................................................
$1,090
JenCo
$2,05
0
Net income..............................................................
1,09
0
$3,140
Total.............................................................................
$3,140
1,500
$1,640
JenCo
Balance Sheet
March 31, 2011
Assets
Liabilities

582
583
Cash................................
$1,00
0
$
260
950
250
300
Notes payable............................
80
0
Equipment......................
70
0
$1,31
0
Owners Equity
Total assets....................
$2,95
0
1,64
0

equity........................................
$2,95
0

583
584

Income Statement
Revenues:
Fees earned.........................................................
$170,0
00
Operating expenses:
Wages expense....................................................
$166,0
00
7,00
0
173,0
00
Net loss.....................................................................
$
3,000

$112,00
0*
10,0
00
Total....................................................................
$122,0
00
$
18,000
Net loss..........................................................
3,000

21,00
0
$101,0
00
584
585

Balance Sheet
March 31, 2011
Liabilities
Assets
Cash...............
$
30,000
Accounts receivable
...............................
14,000
Notes payable ........................
146,00
0
3,000
$
192,000
Building...................
80,000
Land........................
116,00
0
Machinery...............
50,0
00
$293,0
00
Owners Equity
101,00
0

equity........................................


585
586
Description
(1)
Difference
between
Debit and
Credit
Columns

$1,590 debit.
$810
a debit to Accounts
Payable.
$0
(2)
(3)
Colum
Identify
n with account(s)
the
incorrectly
Larger
stated
Total
(4)
Amount that
account(s) is
overstated or
understated
Credit
Rent
Expense
Rent Expense is
understated by
$810
Machinery
Machinery is
understated by
$42,000 and
Accounts
Payable is
understated by
$42,000
Accounts
Payable
$4,455
Debit
Services
Revenue
Services
Revenue is
understated by
$4,455

all.
$1,440
Credit
Store
Supplies
Store Supplies is
understated by
$1,440

debit to Insurance
Expense.
$0
Prepaid
Insurance
Prepaid
Insurance is
understated by
$2,250 and
Insurance
Expense is
overstated by
$2,250
Insurance
Expense

credits to the Cash
account.
owners withdrawals
the owners capital
$4,050
$0
Credit
Cash
Cash is
understated by
$4,050
Owners
Capital
Owners Capital
account is
understated by
$9,900

586
587
account.
Owners
Owners
s
understated by
$9,900

587
588

a. 1.
Dr = Cr
b. 1.
Dr = Cr
c. 1. Dr Cr
d. 1. Dr Cr
e. 1. Dr = Cr
by
$2,000
and

Case A:

5,010 4,290 = 720
720 9 = 80
number is 80.
transposition.


588
589

Case B:
34,400 28,100 = 6,300
6,300 9 = 700

$28,100.
Case C:
942 906 = 36
36 9 = 4
number is 4.
transposition.
value must be $95.

589
590

Chapter 3

Transactions
EXERCISES

Cash
Accounts Payable
(a)
25,500
750 (b)
(d)
3,000
14,10 (e)
0
(h)
(e)
14,100 (c)
0 Balance
2,250 1,05 (g)

0
Ella Tims, Capital
2,000 (i)
Balance
14,100
12,850
25,500 (a)
25,500 Balance
Accounts Receivable
(f)
5,400
Balance
3,150
2,250 (h)
(i)
2,000
Balance
2,000
Office Supplies
(b)
750
Balance
750
Fees Earned
3,000 (d)
5,400 (f)
Office Equipment
(c)
14,100
Balance
14,100
8,400 Balance
Rent Expense
(g)
1,050
Balance
1,050

590
591

Neil Simon, Capital
Cash
Jan.
31
Feb.
700
4,000
Feb.
14
2,800
60
23
2,400
1,000
25
800
26
800 Jan. 31
800 Bal.
2
20
Bal.
40
Jan.
31
Feb.
25
Accounts Receivable
Jan.
31
1,200
2,40
0
Feb.
20
Bal.
-01,000
1,000
15,000
Feb.
12

591
592
18
Bal.
Service Revenue
1,90
0
2,600 Jan. 31
15,700
2,800 Feb. 2
Prepaid Insurance
Jan.
31
Feb.
-04,000
15,000
12
1,900
18
22,300 Bal.
14
Bal.
4,000
Wages Expense
Computer Equipment
Jan.
31
Feb.
480
7,600
Jan. 31
1,080
Feb. 26
800
Bal.
1,880
10
Bal.
8,080
Accounts Payable
Feb.
60
60 Jan. 31
NOTE:
23 There is no entry to be recorded
for February 21.
-0- Bal.
Notes Payable
-0- Jan. 31
7,600 Feb.
10
7,600 Bal.
Analysis component:
592
593

593
594

Cash
Mar.
31
Apr.
2
19
Bal.
1,800
400 Apr.
780
300
10
15
2,000
1,000
29
Mar.
31
Apr.
29
Bal.
500
1,000
1,500
2,880
Repair Revenue
14,000 Mar.
Accounts Receivable
Mar.
31
Apr.
18
4,800
Bal.
4,000
31
2,000 Apr.
780 Apr. 2
19
1,200
1,200
18
15,980 Bal.
Repair Supplies
Mar.
31
Apr.
9
1,400
Bal.
2,290
Rent Expense
Mar.
31
Apr.
25
Bal.
890
950
250
1,200
Equipment
Mar.
31
Apr.
15
Bal.
7,400
300
7,700
Accounts Payable
Apr.
10
400
500 Mar.
31

594
595
890 Apr.
250
9
25
1,240 Bal.
2,350 Mar.
31
2,350 Bal.

595
596

2.
GENERAL JOURNAL
Account Titles and
PR
Explanations
Dat
e
201
1
Jul
Cash..............................
y
1
by owner.
Debit
101
5,000
301
1 Equipment.....................
0
Purchased equipment
on credit.
150
1 Cash..............................
2
Revenue...................
cash.
101
1 Expenses.......................
4
Cash.........................
Paid expenses.
501

5
Revenue...................
account.
106

1
302
Page 1
Credit
5,000
2,500
201
2,500
10,000
401
10,000
3,500
101
3,500
1,500
401

1,500
250
596
597
Cash.........................
101

250
597
598

solution.
1 and 3.
Cash
July 1
12
Balance
101
5,000
10,000
3,500 July 14
250
31
11,250
Accts. Receivable
July
15
106
1,500
Equipment
July 10
150
2,500
Accounts Payable
201
2,500
Sue Ware,
Capital
5,000
July 10
301
July 1

598
599
Sue Ware,
Withdrawals
July 31
302
250
Revenue
401
10,000
1,500
11,500
July 12
15
Balance
Expenses
501
July 14
3,500

599
600

1 and 3.
Account No. 101
Cash
Date
Explanation
PR
Debit
Credit
Balance
2011
July
G1
5,000
5,000
12
G1
10,000
15,000
14
G1
3,500
11,500
31
G1
250
11,250
Account No. 106
Accounts Receivable
Date
Explanation
PR
Debit
Credit
Balance
2011
July 15
G1
1,500
Account No. 150
Equipment
Date
Explanation
1,500
PR
Debit
Credit
Balance
2011
July 10
G1
2,500
Account No. 201
Accounts Payable
Date
Explanation
2,500
PR
Debit
Credit
Balance
2011
July 10
G1
2,500
Account No. 301
Sue Ware, Capital
Date
Explanation
2,500
PR
Debit

Credit
Balance
600
601
2011
July
G1
5,000
Account No. 302
Date
Explanation
5,000
PR
Debit
Credit
Balance
2011
July 31
G1
250
Account No. 401
Revenue
Date
Explanation
250
PR
Debit
Credit
Balance
2011
July 12
G1
10,000
10,000
15
G1
1,500
11,500
Account No. 501
Expenses
Date
Explanation
PR
Debit
Credit
Balance
2011
July 14
G1
3,500
3,500

4.
DelaWare
Trial Balance
July 31, 2011
Acct
. No.
Account Title
101Cash.........................
150Equipment................
Credi
Debit
t
$11,
250
1,50
0
2,50
0

601
602
$
2,50
0
5,00
0

401Revenue...................
501Expenses..................
Totals...........................
5.
250
11,5
00
3,
500
$19,
000
$19,
000
DelaWare
Income Statement
Revenue................................
$11,
500
3,
500
$8,0
00
Expenses...............................
Net income............................
DelaWare
Net income......................
Total...................................
$5,0
00
8,0
00
$
0
13,
000
13,0
00

250
602
603
$12,
750

603
604

5. (concluded)
DelaWare
Balance Sheet
July 31, 2011
Assets
Liabilities
Cash..................................
$11,25
0
1,500
Equipment.........................
2,500
$
2,500
Owners Equity
Sue Ware, capital.....................
12,75
0

Total assets.......................
$15,25
0
owners equity......................
$15,25
0
Analysis component:
transaction.
Account
Number
Account Name
110
Cash

604
605
115
Accounts Receivable
160
Office Equipment
210
Accounts Payable
215
Unearned Revenue
310
Wes Bosse, Capital
320
410
Consulting Revenues
510
Salaries Expense
520
Rent Expense
530
Utilities Expense

605

606

2.
Cash
Bal
Feb
1
10
Bal
11
Accounts
0
Receivable
11,5 2,00 Feb Bal 6,00
00
0
5
0
8,50 500
17
0
2,50 10,0
28
0
00
10,0
00
Unearned
21
Revenue
5
500 Bal
Wes Bosse,
Capital
9,50
0
11
5
31
0
Bal
2,50 Feb
0 10
3,00 Bal
0
Salaries
Expense
Bal
10,0
00
Feb
10,0
28
00
Bal
20,0
00
51
0
Rent
Expense
Bal 7,50
0
52
0
Office Equipment 16
0
Bal
12,5
00
Wes Bosse,
Withdrawals
Bal
2,00
0
Feb
500
17
Bal
2,50
0
32
0
Utilities
Expense
Bal
1,00
0
53
0
Accounts
21
Payable
0
Feb 2,00 3,00 Bal
5
0
0
1,00 Bal
0
Consulting
Revenues
37,5
00
8,50
0
46,0
00
41
0
Bal
Feb
1
Bal
91
607
608

1.
Dat
e
201
1
Fe
b.
1
General Journal
Account Titles and
PR
Explanations
Cash.............................
Consulting
Revenues.....................
Performed work for
cash.
Cash.......................
Paid account.
1
0
Cash.............................
Unearned Revenue. .
Received cash in
advance.
1
2
No entry.
1
7
Wes Bosse,
Withdrawals.................
Cash.......................
2
8
Cash.......................
Paid salaries.
Debit
10
1
41
0
8,500
21
0
10
1
2,000
10
1
21
5
2,500
32
0
10
1
500
51
0
10
1
10,000
Page G1
Credit
8,500
2,000
2,500
500
10,000
3.

608
609
Bosse Advisors
Trial Balance
February 28, 2011
Acct.
No.
Account Title
Debit
Credit
101 Cash.....................................
$
10,000
6,000
$
1,000
3,000
9,500
2,500
46,00
0
520 Rent expense.......................
7,500
1,00
0
Totals................................... $59,50 $59,5
0
00

609
610

4.
Assets
Cash..................
Accounts
Office
Bosse Advisers
Balance Sheet
February 28, 2011
Liabilities
$10,00
0
6,000
Unearned revenue...
12,50
0
Owners Equity
$28,50
0

owners equity.....
$
1,000
3,00
0
$
4,000
24,500
$28,50
0
Capital = 9,500
Opening Balance
+ 46,000 Revenues
2,500 Withdrawals
Analysis component:

610
611

a.
Cash.......................................................................
7,000
Equipment.............................................................
5,600
Automobiles...........................................................
11,000

23,600
the business.
Cash................................................................
3,600
3,600
600
Cash................................................................
600
200
Equipment.............................................................
9,400
9,600
e. Cash.................................................
2,500
2,500
Cash................................................................
2,400
2,400

Cash................................................................
700
700

611
612

2011
April Cash..................................................................
5
1,500
1,500
8 Supplies........................................
3,000
3,000
57,000
Cash............................................................
57,000
Paid salaries.
3,000
Cash............................................................
3,000
21 No entry.
9,000
9,000

$1,500 x 6 = $9,000
29 Cash..................................................................
3,000
3,000
612
613
Cash............................................................
1,800
1,800

613
614

2,700
c. Cash..................................................
3,150
2,700
3,150

in the company.
to the client.
same amount.
Cash............................................
1,125
Cash............................................
930
1,125
930

614
615

customers.

615
616

Parts a and b:
Account No. 101
Cash
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
850
2011
Jan.
G1
3,500
2
0
G1
3
1
G1
3
1
G1
3,000
4,350
3
1
G1
750
3,600
2,000
5,000
Explanation
2,350
7,350
Account No. 106
Accounts Receivable
Date
4,350
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
300
2011
Jan.
1
2
G1
3
1
G1
9,000

9,300
5,000
4,300
616
617
Account No. 167
Equipment
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,500
2011
Jan.
2
0
G1
12,000
Account No. 201
Accounts Payable
Date
Explanation
13,500
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
325
2011
Jan.
2
0
G1
10,000
Account No. 301
Jay Walker, Capital
Date
Explanation
10,325
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
2,325
2011
Jan.
G1

3,500
5,825
617
618

Account No. 302
Date
Explanation
PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
300
2011
Jan.
3
1
G1
750
Fees Earned
Date
Explanation
1,050
Account No. 401

PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,800
2011
Jan.
1
2
G1
9,000
Salaries Expense
Date
Explanation
10,800
Account No. 622

PR
Debit
Credit
Balance
2010
Dec.
3
1 Beginning balance
1,500
2011
Jan.
3
1
G1
3,000

4,500
618
619

General Journal
Date
Page 1
Debit
Credit
2011
Jan. 1 Cash..................................................................
10
1
30
1
3,500
3,500

10
6
Fees Earned................................................
40
1
9,000
9,000

20 Equipment.........................................................
16
7
12,000
Cash............................................................
10
1
2,000
20
1
10,000

balance on credit.
31 Cash..................................................................
10
1
10
6
5,000
5,000

62

3,000
619
620
2
Cash............................................................
10
1
3,000

30
2
Cash............................................................
10
1
750
750

Analysis component:

General Journal

Page
G1
620
621
Date
2011
Aug.
Account Titles and

Explanations
PR
Debit
Cash.........................................
10
1
15,000
16
7
17,000
30
1
Credit
32,000

1
Prepaid Rent......................................
13
1
Cash............................................
10
1
6,500
6,500

5
Office Supplies...................................
12
4
Cash............................................
10
1
1,800
1,800

20
Cash..................................................
10
1
40
1
9,200
9,200

31
69
0
Cash...................................
10
1
1,100
1,100

621
622

622
623

Cash
Date
Explanation
Account No. 101

PR
Debit
Credit
Balance
G1
15,000
G1
6,500
8,500
G1
1,800
6,700
2
0
G1
3
1
G1
2011
Aug.
9,200
Explanation
15,900
1,100
14,800
Account No. 124
Office Supplies
Date
15,000
PR
Debit
Credit
Balance
2011
Aug.
G1
1,800
Account No. 131
Prepaid Rent
Date
Explanation
1,800
PR
Debit
Credit
Balance
2011
Aug.
G1
6,500
Account No. 167
Date
Explanation
6,500
PR
Debit
G1
17,000
Credit
Balance
2011
Aug.

17,000
623
624
Account No. 301
Date
Explanation
PR
Debit
Credit
Balance
2011
Aug.
G1
32,000
Account No. 401
Date
Explanation
32,000
PR
Debit
Credit
Balance
2011
Aug.
2
0
G1
9,200
Utilities Expense
Date
Explanation
9,200
Account No. 690

PR
Debit
Credit
Balance
2011
Aug.
3
1
G1
1,100

1,100
624
625
THE PIXEL SHOP

Trial Balance
August 31, 2011
Acct
No.
Account Title
Debit Credit
101 Cash.................................. $ 14,800

124 Office supplies...................
1,800
131 Prepaid rent.......................
6,500
17,000
$32,000
9,200
1,100
Totals................................. $41,200
$41,200
Analysis component:


625
627

Cash
Aug.
1
20
Bal
Aug.
1
101
15,00 6,50 Aug. 1

0
0
9,200 1,80
5
0
1,10
31
0
14,80
0
Photography 16
Equipment 7
17,0
00
Photography Fees 40
Earned 1
9,2 Aug.
00 20
Office
Supplies
Aug. 1,80
5
0
124
Prepaid
Rent
Aug. 6,50
1
0
13
1

1
32,0 Aug.
00 1
Aug.
31
Utilities
Expense
1,10
0
690
THE PIXEL SHOP

Trial Balance
August 31, 2011
Acct.
No.
Account Title
Debit Credit
101
Cash...............................................
$ 14,800
124
Office supplies................................
1,800
131
Prepaid rent...................................
6,500
167
17,000
301

..........................................$32,000
401

..............................................9,200
690
1,100

627
628
Totals.............................................
$41,200
$41,200
Analysis component:

Hogans Consulting
Income Statement
Operating expenses:
Rent expense....................
$46,
000
$37,
000
14,0
00

Net loss.................................
51,0
00
$
5,00
0
Hogans Consulting
$
0

628
629
50,0
00
$50,
000
Total...................................
Net loss........................
$2,0
00
5,00
0

31.........................................
7,00
0
$43,
000
Hogans Consulting
Balance Sheet
December 31, 2011
Assets
Liabilities
Cash..................................
$12,00
0
8,300
Notes payable..........................
53,500
Prepaid rent.......................
5,000
$54,30
0
Equipment.........................
72,00
0
Owners Equity
800
43,000

Total assets.......................
$97,30
0
owners equity......................
$97,30
0
Analysis component:
629
630

JenCo
Income Statement
Revenues:
Service revenue...........................................................
$1,900
Operating expenses:
$
800
10
810
Net income........................................................................
$1,090
JenCo
$2,05
0
Net income..............................................................
1,09
0
$3,140
Total.............................................................................
$3,140
1,500
$1,640
JenCo
Balance Sheet
March 31, 2011
Assets
Liabilities

630
631
Cash................................
$1,00
0
$
260
950
250
300
Notes payable............................
80
0
Equipment......................
70
0
$1,31
0
Owners Equity
Total assets....................
$2,95
0
1,64
0

equity........................................
$2,95
0

631
632

Income Statement
Revenues:
Fees earned.........................................................
$170,0
00
Operating expenses:
Wages expense....................................................
$166,0
00
7,00
0
173,0
00
Net loss.....................................................................
$
3,000

$112,00
0*
10,0
00
Total....................................................................
$122,0
00
$
18,000
Net loss..........................................................
3,000

21,00
0
$101,0
00
632
633

Balance Sheet
March 31, 2011
Liabilities
Assets
Cash...............
$
30,000
Accounts receivable
...............................
14,000
Notes payable ........................
146,00
0
3,000
$
192,000
Building...................
80,000
Land........................
116,00
0
Machinery...............
50,0
00
$293,0
00
Owners Equity
101,00
0

equity........................................


633
634
Description
(1)
Difference
between
Debit and
Credit
Columns

$1,590 debit.
$810
a debit to Accounts
Payable.
$0
(2)
(3)
Colum
Identify
n with account(s)
the
incorrectly
Larger
stated
Total
(4)
Amount that
account(s) is
overstated or
understated
Credit
Rent
Expense
Rent Expense is
understated by
$810
Machinery
Machinery is
understated by
$42,000 and
Accounts
Payable is
understated by
$42,000
Accounts
Payable
$4,455
Debit
Services
Revenue
Services
Revenue is
understated by
$4,455

all.
$1,440
Credit
Store
Supplies
Store Supplies is
understated by
$1,440

debit to Insurance
Expense.
$0
Prepaid
Insurance
Prepaid
Insurance is
understated by
$2,250 and
Insurance
Expense is
overstated by
$2,250
Insurance
Expense

credits to the Cash
account.
owners withdrawals
the owners capital
$4,050
$0
Credit
Cash
Cash is
understated by
$4,050
Owners
Capital
Owners Capital
account is
understated by
$9,900

634
635
account.
Owners
Owners
s
understated by
$9,900

635
636

a. 1.
Dr = Cr
b. 1.
Dr = Cr
c. 1. Dr Cr
d. 1. Dr Cr
e. 1. Dr = Cr
by
$2,000
and

Case A:

5,010 4,290 = 720
10.
Divide the difference by 9

720 9 = 80
11.
The quotient equals the difference between the two transposed
numbers.
number is 80.
12.
The number of digits in the quotient tells us the location of the
transposition.


636
637

637
638

Case B:
34,400 28,100 = 6,300
6,300 9 = 700

$28,100.
Case C:
942 906 = 36
10.
Divide the difference by 9

36 9 = 4
11.
The quotient equals the difference between the two transposed
numbers.
number is 4.
12.
The number of digits in the quotient tells us the location of the
transposition.
value must be $95.

638
639

Chapter 4
Adjusting Accounts for

Financial Statements
EXERCISES

1.
7.
2.
8.
3.
9.
4.
10.
5.
11.
6.
12.

639
640
a
)
201
1
Dec
.
31 Amortization Expense, Equipment.....
32,000
Equipment.........................................
To record amortization expense for
the year.
32,000
b
)
c
)
31 Office Supplies Expense....................
d
)
31 Unearned Fee Revenue.....................
e
)
f)
31 Wages Expense.................................
Wages Payable............................
To record wages accrued but not
yet paid.
8,000
6 Wages Payable..................................
8,000
Wages Expense.................................
12,000
g
)
11,920
expired
during the year; $14,000 $2,080.
11,920
5,252
Office Supplies............................
To record office supplies
consumed during
the year; $600 + $5,360 $708.
5,252
20,000
Fee Revenue...............................
To record earned portion of fee
received in
advance; $30,000 2/3 = $20,000.
20,000
9,200
expired
during the year.
201
2
Jan.

9,200
8,000
640
641
Cash..........................................
To record the payment of wages.

20,000
641
642

201
1
a
)
Dec.
31 Unearned Revenue.........................
16,0
00
Revenue...........................................
16,000
To record earned revenue;

$18,500 - $2,500 = $16,000.
31 Amortization Expense, Building......
b
)
10,5
00
Accumulated Amortization, Building...
c
)
10,500
31 Spare Parts Expense...............................
350
Spare Parts Inventory........................
350
To record the use of spare parts

inventory;
$450 - $100 = $350.
d
)
31 Accounts Receivable...............................
3,55
0
Revenue...........................................
3,550
e
)
31 Utilities Expense....................................
Utilities Payable (or Accounts
Payable)................................................

1,30
0
1,300
642
643
To record accrued utilities.
201
2
f)
Jan.
4 Cash......................................................
3,55
0
3,550

revenues.
g
)
14 Utilities Payable (or Accounts Payable)....
1,30
0
Cash...............................................
1,300
To record payment of accrued

utilities.

201
1
a)
Sept
.
30 Unearned Revenue................................
12,0
00
Revenue..........................................
12,000
To record earned revenue.
b)
30 Amortization Expense, Furniture...................................

Accumulated Amortization, Furniture
150
150
To record amortization for one month;

7,200/4 yrs = 1,800/yr; 1,800/12
months = 150/month.

643
644
c)
Sep
t.
30 Office Supplies Expense.......................
5,00
0
Office Supplies...............................
5,000
To record the use of office supplies.
d)
28,0
00
Revenue........................................
28,000
e)
30 Rent Expense......................................
7,00
0
Rent Payable (or Accounts Payable)
7,000
To record accrued rent.
f)
Oct.
3 Cash.................................................
28,0
00
28,000

revenue.
g)
4 Rent Payable (or Accounts Payable)...
7,00
0
Cash.........................................
7,000
To record payment of accrued rent.

2011
a
)
Ma
r.
31 Unearned Rent................................................................

7,500
644
645
Rent Earned......................................
7,500
Earned five months rent previously

paid in advance;
$1,500 x 5 = $7,500.
b
)
31 Rent Receivable.....................................
2,700
Rent Earned......................................
2,700
Earned two months rent that has not

yet
been collected; $1,350 x 2 = $2,700.
c
)
Apr
.
22 Cash......................................................
4,050
Rent Receivable................................
2,700
Rent Earned......................................
1,350
Collected rent for February, March, and

April.

645
646

201
1
a)
Dec.
31 Accounts Receivable.........................................................
2,00
0
2,00
0
To record accrued fees earned.

b)
31 Rent Expense..........................................
8,00
0
Prepaid Rent......................................
8,00
0
To record expired rent.

c)
31 Amortization Expense, Machinery.............
400
Accumulated Amortization, Machinery.
40
0

d)
31 Unearned Fees........................................
2,80
0
2,80
0
To record fees earned.

e)
31 Salaries Expense.....................................
Salaries Payable.................................

5,00
0
5,00
0
646
647

a. $1,650 (300 + 2,100 750 = 1,650)
b. $5,700 (1,600 + 5,400 1,300 = 5,700)
c. $10,080 (9,600 + 1,840 1,360 = 10,080)
d. $1,375 (6,575 + 800 6,000 = 1,375)
Proof:
(a)
(b)
(c)
(d)
Supplies on handJanuary 1..........
$ 300
$1,600
$
1,360
$1,375
Supplies purchased during the

year.............................................
2,100
5,400
10,08
0
6,000
Total supplies available................. $2,400
$7,000
$11,44
0
$7,375
Supplies on handDecember 31....
(5,700)
(1,84)
0
$1,300
$
9,600
(750)
Supplies expense for the year....... $1,650

(800)
$6,575
647
648

Adjusting entry:
2012
Dec.31
Wages Expense.........................................
1,000
Wages Payable.....................................
1,000
Adjusting entry to record accrued wages for one
day; 5 $200.
Payday entry:
2013
Jan. 4
Wages Expense.........................................
3,000
Wages Payable..........................................
1,000
Cash.....................................................
4,000
Paid employees' accrued and current wages;
5 employees x $200/day x 4 days = $4,000.

201
1
a)
Apr
.
30 Interest Expense..........................
2,080
Interest Payable..............................
2,080
To record accrued interest expense;

0.8% $780,000 10/30.
May
20 Interest Payable...................................
2,080
Interest Expense...................................
4,160
Cash...............................................
6,240

current
expense; 0.8% $780,000 20/30.
201
648
649
1
b)
Apr
.
30 Salaries Expense...................................
3,600
3,600
To record accrued salaries;

$9,000/5 days = $1,800/day;
2 days x $1,800 = $3,600.
May
3 Salaries Payable...................................
3,600
Salaries Expense...................................
5,400
Cash...............................................
9,000

current
salaries; 3 days x $1,800 = $5,400.

201
1
c)
Apr
.
30 Legal Fees Expense...............................
2,50
0
Legal Fees Payable..........................
2,50
0
To record accrued legal fees.
May
12 Legal Fees Payable................................

Cash................................................
2,50
0
2,50
0
To pay accrued legal fees.

649
650
2011
Dec.31
Fees Earned..........................................
To record unbilled fees; 30% $12,000.
3,600
31
Unearned Fees...........................................
Fees Earned..........................................
To record earned fees that had been
collected in advance; 70% $12,000.
8,400
31
Amortization Expense, Computers.............

Accumulated Amortization, Computers
To record amortization on computers.
3,000
31
Amortization Expense, Office Furniture......

Office Furniture..................................
To record amortization on office furniture.
3,500
31
Salaries Expense........................................
Salaries Payable...................................
4,900
31
Insurance Expense.....................................
Prepaid Insurance.................................
To record expired prepaid insurance.
2,600
31
Office Supplies Expense.............................

Office Supplies......................................
To record use of office supplies.
960
31
Utilities Expense..........................................
Utilities Payable.....................................
To record unpaid utility costs.
3,600
8,400
3,000
3,500
140
4,900
2,600
960
140

Analysis component:
The GAAP of matching and revenue recognition requires that adjusting
entries be recorded at the end of each accounting period to ensure
revenues and expenses are allocated to the period in which they were
incurred. If the December 31, 2011 adjustments for Javelin Company
were not recorded, revenues would be understated by $12,000;
expenses would be understated by $15,100; and net income would be
overstated by the difference of $3,100 ($15,100 - $12,000 = $3,100).

650
651

Ayotte Music
Partial Work Sheet
February 28, 2011
Account
Unadjusted
Trial Balance
Debit
Cred
it
Adjustments
Debi
t
Cred
it
Cash.................................. 5,000
Debi
t
Cred
it
5,000
Accounts receivable........... 4,500
Prepaid insurance..............
Adjusted Trial
Balance
5,900
c)
1,40
0
700
b)
250
Equipment......................... 12,00
0
450
12,000
a)
2,400
equipment..........................................
6,000
Accounts payable...............
1,200
1,200
Jane Adams, capital............
9,000
9,000
Jane Adams, withdrawals.... 3,000

Revenues...........................
Amortization expense,
equipment
3,000
45,00
0
c)
1,400
a)
2,400
Salaries expense................ 29,00

0
Insurance expense.............
8,400
46,40
0
2,400
29,000
b) 250
7,250
7,000
651
652
Totals................................ 61,20 61,20

0
0
4,05
0
4,05 65,000 65,00

0
0

652
653

Ayotte Music
Income Statement
Revenue............................................................
$46,400
Operating expenses:
Salaries expense...........................................
$29,00
0
Insurance expense........................................
7,250
Amortization expense, equipment..................
2,40
0
38,650
Net income........................................................
$ 7,750
Ayotte Music
Jane Adams, capital, March 1..............................
$ 9,000
Add: Net income................................................
7,750
Total.............................................................
$16,750
Less: Withdrawal by owner................................
3,000
Jane Adams, capital, February 28........................
$13,750

653
654
Ayotte Music
Balance Sheet
February 28, 2011
Assets
Cash.................................................................
$ 5,000
Accounts receivable...........................................
5,900
Prepaid insurance..............................................
450
Office equipment...........
$12,00
0
Less: Accumulated amortization, office

equipment.........................................................
Total assets.......................................................
8,4
00
3,600
$14,950
Liabilities
Accounts payable...............................................
$ 1,200
Owners Equity
Jane Adams, capital...........................................
13,750
Total liabilities and owners equity.....................
$14,950

654
655

Analysis component:
The GAAP which requires the preparation of financial statements is

the time period principle. The time period principle assumes that an
organizations activities can be divided into specific time periods.
Since information must reach decision makers frequently and
promptly, the accounting system needs to prepare reports regularly.
The standard reporting period is one year although many companies
report quarterly.
*Exercise 4-13
a)
Cash.....................................................
1,800
Accounts Payable............................

1,800
655
656
OR
1,800
Cash.............................................
1,800
Office Supplies........................
1,800
Office Supplies.............................

656
657
1,800
Accounts Payable....................

b)
Revenue...............................................
4,500
Accounts Receivable........................

4,500
657
658
OR
4,500
Revenue.......................................
4,500
Cash.......................................
4,500
Cash.............................................

658
659
4,500

c)
Withdrawals..........................................
1,500
Salaries Expense.............................

1,500
659
660
OR
Cash.....................................................
1,500
Salaries Expense............................
1,500
Withdrawals.........................................
1,500

660
661
Cash..............................................
1,500

661
662

d)
750
Revenue.................................................
750

OR
750
Cash.......................................................
750
Cash.................................................................
Revenue.................................................
750
750
Analysis component:
If the error in (b) is not corrected, revenue and net income on the
income statement will be overstated each by $4,500. On the balance
sheet, assets (accounts receivable) and equity will be overstated each
by $4,500.

2011
a) Dec.
1
Supplies Expense................................. 6,000

Cash..............................................
6,000
Purchased supplies.
b)
2 Insurance Expense............................... 2,880
Cash..............................................
2,880
Paid insurance premiums.
c)
15 Cash.....................................................24,000
Remodelling Fees Earned...............
24,000
Adjusting entries:
2011
d) Dec. 31 Supplies................................................ 3,840
Supplies Expense...........................
3,840
Adjusted expense for unused supplies on hand.
662
663
e)
f)
31 Prepaid Insurance................................. 2,400

Insurance Expense.........................
Adjusted expense for unexpired coverage;
$2,880 $480.
31 Remodelling Fees Earned.....................16,800
Unearned Remodelling Fees...........
Adjusted revenues for unfinished projects;
$24,000 $7,200.

2,400
16,800
663
664

a) Initial credit recorded in Unearned Fees account:
July 1
Cash................................................
2,000
Unearned Fees...........................
6
Cash................................................
Unearned Fees...........................
8,400
12
Unearned Fees................................
Fees Earned...............................
2,000
18
Cash................................................
Unearned Fees...........................
7,500
27
Unearned Fees................................
Fees Earned...............................
8,400
31
No entry.
b) Initial credit recorded in Fees Earned account:

July 1
Cash................................................
2,000
Fees Earned...............................
6
Cash................................................
Fees Earned...............................
12
No entry.
18
Cash................................................
Fees Earned...............................
27
No entry.
31
Fees Earned....................................
Unearned Fees...........................
8,400
7,500
7,500

2,000
8,400
2,000
7,500
8,400
2,000
8,400
7,500
7,500
664
665
job.
Adjusting entry to reflect unearned fees for unfinished

c) Under the first method:
Unearned fees = $2,000 + $8,400 $2,000 + $7,500 $8,400 =
$7,500
Fees earned = $2,000 + $8,400 = $10,400
Under the second method:
Unearned fees = $7,500
Fees earned = $2,000 + $8,400 + $7,500 $7,500 = $10,400

665

Chapter 2 Financial Statements

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1

Quick Study 2-2

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-4

1 Delco performed work for a client located in

3 Delcos December 31, 2011 balance sheet

4 Included in Delcos assets was land and

5 Delcos bank manager wants to verify the

6 Delcos owner, Tom Del, consistently buys

Quick Study 2-5

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-7

Month ended April 30, 2011

Month ended May 31, 2011

Net income (loss)

Net income (loss)

Statement of Owner's Equity

Statement of Owner's Equity

Month ended April 30, 2011

Month ended May 31, 2011

Tim Allin, capital, April

Tim Allin, capital, May 1

Less: Withdrawals by owner

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Total liabilities and

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-8

Quick Study 2-11

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Tim Roadsters withdrawals 35

13 Tim Roadsters investments 60

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-12

2 Total operating expenses.........

6 Tim Roadster, capital (April 30,

7 Total liabilities and owners

Quick Study 2-13

5. Joan Bennishs investments

7. Joan Bennish, capital, May 1,

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

d 10 Joan Bennishs withdrawals

d 12 Consulting fees earned..........

c 13 Joan Bennish, capital, May

Quick Study 2-14

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Quick Study 2-14 (concluded)

Joan Bennish, capital

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

d) $25,000 Beginning Equity + $40,000 Investment $52,000 Ending

$) $36,00 $12,00 $21,00 $92,00

60,000 36,000 31,500 37,500 150,00

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-3 (15 minutes)

Exercise 2-4 (15 minutes)

The owner, Jean Dobbs, invested $84,000 of assets during

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-5 (15 minutes)

Accounts payable.... $ 7,500

$87,750 (or 92.13% calculated as $87,750/$95,250 100) of

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.

Exercise 2-7 (15 minutes)

Copyright 2007 by McGraw-Hill Ryerson Limited. All rights reserved.