Chapter 7

Analyzing and Summarizing Business Transactions

of a Service Entity

Exercises

Exercise 1

a. Received cash from a credit customer

b. 1. Owner invested cash into business
2. Cash was received as a result of revenue being earned
c. Purchased supplies on credit
d. 1. Owner withdrew cash from business
2. Paid cash for expense incurred
e. Earned revenue, cash to be received, at a later time
f. Made payment on an account payable
g. Purchased land for cash

Exercise 2

a. P200,000
b. P260,000

Exercise 3

b. NC, NC, NC
c. +, +, NC
d. NC, NC, NC
e. , NC,
f. +, NC, +
g. , NC,

Exercise 4

a. BS g. IS
b. OE h. OE
c. IS i. BS
d. IS j. OE
e. BS k. BS
f. BS
2 Chapter 7

Exercise 5

Accounts Office Accounts H. Phan,

Cash Receivable Equipmen Payable Capital
t
b. P10,000 + P10,000
Balance P40,000 0 P10,000 0 P50,000
c. + P 5,000 + P 5,000
Balance P40,000 P 5,000 P10,000 0 P55,000
d. + P20,000 + P20,000
Balance P40,000 P 5,000 P30,000 P20,000 P55,000
e. + P 2,000 P 2,000
Balance P42,000 P 3,000 P30,000 P20,000 P55,000
f. P 5,000 P 5,000
Balance P37,000 P 3,000 P30,000 P15,000 P55,000
g. + P 1,000 P 1,000
Balance P37,000 P 3,000 P30,000 P16,000 P54,000

Exercise 6

Accounts Accounts H. Lee,

Cash Receivable Supplies Payable Capital
b. + P 7,000 + P 7,000
Balance P120,000 0 P 7,000 P 7,000 P120,000
c. +P 4,000 + P 4,000
Balance P120,000 P 4,000 P 7,000 P 7,000 P124,000
d. P 7,000 P 7,000
Balance P113,000 P 4,000 P 7,000 0 P124,000
e. P 8,000 P 8,000
Balance P105,000 P 4,000 P 7,000 0 P116,000
f. + P 2,000 P 2,000
Balance P107,000 P 2,000 P 7,000 0 P116,000
g. P 1,500 P 1,500
Balance P105,500 P 2,000 P 7,000 0 P114,500

Exercise 7

January 10. No recording need be made. No business transaction yet.

February 15. Event should be recorded. Transaction has take place with the
exchange of values.
 Analyzing and Summarizing Business Transactions of a Service Entity 3

March 1. Even should be recorded. Transaction has take place with the
exchange of values.
Exercise 8

a. Liability g. Liability
b. Asset h. Asset
c. Expenses i. Asset
d. Revenue j. Asset
e. Expense k. Liability
f. Asset l. Asset

Exercise 9

a. Credit g. Credit
b. Debit h. Debit
c. Debit i. Debit
d. Credit j. Debit
e. Debit k. Credit
f. Debit l. Debit

Exercise 10

September 6

Accounts receivable 19,000

Service revenue 19,000

September 16

Cash 9,000
Accounts receivable 9,000

Exercise 11

a. (+)
b. (+)
c. (0)
d. ()
e. (0)
f. ()
g. (0)
h. (+)
4 Chapter 7

Exercise 12

1. e
2. b
3. d
4. c
5. a

Exercise 13

a. P432,000: Assets P1,116,000 liabilities P684,000 = owners equity

P432,000

b. P1,875,000: Liabilities P1,125,000 + owners equity P750,000 = assets

P937,500

c. P330,000: Assets P615,000 owners equity P285,000 = liabilities P330,000

Exercise 14

Transaction Assets = Liabilities + Owners Equity

a I I NE
b NE* NE NE
c D D NE
d D D NE
e I NE I
f I I NE
g I NE I
h NE* NE NE
i NE* NE NE
*Could be I/D offsetting
 Analyzing and Summarizing Business Transactions of a Service Entity 5

Exercise 15

JANNY COMPANY
Statement of Cash Flows
For the Month Ended January 31, 2007

Cash flows from operating activities:

Cash received from revenues.................................................................
P100,000
Cash paid for expenses..........................................................................
(62,000)
Net cash provided by operating activities..................................................................
P38,000

Cash flows from investing activities:

Cash paid for equipment............................................................................................
(25,000)

Cash flows from financing activities:

Cash received from sale of share capital................................................
P50,000
Cash used to repay bank loans..............................................................
(20,000)
Net cash provided by financing activities.................................................30,000

Increase in cash.........................................................................................
P43,000
Cash balance, January 1, 2007..................................................................56,000
Cash balance, January 31, 2007................................................................ P99,000

Exercise 16

BEIGE, INC.
Income Statement
For the Month Ended March 31, 2007
Revenues......................................................................................................................
P85,000
Expenses.......................................................................................................................
50,000
Net income....................................................................................................................
P35,000

The cash received from bank loans is a positive cash flowfinancing activityin
the statement of cash flows, but is not included in the income statement. Similarly,
dividends paid to stockholders are a negative cash flowfinancing activityin the
statement of cash flows, but are not included in the income statement.
6 Chapter 7

Exercise 17

ANDALASA COMPANY
Income Statement
For the Month Ended August 31, 2007
Service revenues...........................................................................................................
P100,000
Expenses.......................................................................................................................
75,000
Net income....................................................................................................................
P25,000
The following four items represent cash flows, but are not revenues or expenses
that should be included in the income statement:
Investment by stockholders
Loan from bank
Payments to long-term creditors
Purchase of land

Exercise 18

a. Pay a liability
b. Investment by owner
Revenue transaction
c. Purchase of asset on account
Borrow money
d. Purchase of asset for cash
Sale of asst for cash
Collection of account receivable
e. Withdrawal by owner
Expense transaction

Exercise 19

a. Increased assets (cash)

b. No effect on total assets. Increase in land offset the decrease in cash.
c. Increased assets (cash)
d. Decreased assets (cash)
e. Increased assets (machinery and equipment)
f. Increased assets (accounts receivable)
g. Decreased assets (cash)
h. No effect on total assets. Increase in cash offset the decrease in accounts
receivable.
i. No effect (a personal transaction)
j. No effect on total assets. Increase in cash offset the decrease in land.
 Analyzing and Summarizing Business Transactions of a Service Entity 7

Exercise 20

a. Increase in asset (Cash)

Increase owners equity (Capital)
b. Increase asset (Office Supplies)
Decrease asset (Cash)
c. Increase asset (Cash)
Increase owners equity (Service Revenue)
d. Decrease in asset (Cash)
Decrease in owners equity (Rent Expense)
e. Increase asset (Accounts Receivable)
Increase owners equity (Service Revenue)
f. Increase asset (Office Furniture)
Increase liability (Accounts Payable)
g. Increase asset (Cash)
Decrease asset (Accounts Receivable)
h. Decrease asset (Cash)
Decrease liability (Accounts Payable)
i. Increase asset (Cash)
Decrease asset (Land)

Exercise 21

Red Co. White Co. Blue Co.

Beginning:
Assets...................................................
P 500,000 P 900,000 P1,100,000
Liabilities...............................................
(200,000) (600,000) (500,000)
Owners Equity......................................
P 300,000 P 300,000 P 600,000
Ending:
Assets...................................................
P 700,000 P 150,0002 P1,600,000
Liabilities...............................................
(350,000) 800,000 700,000
Owners Equity......................................
P 350,000 P 700,000 P 900,000
Owners Equity:
Investments by Owner..........................
P 0 P 100,000 P 200,000
Withdrawals by Owner..........................400,000 700,000 1,000,000
Net increase (decrease)........................
P (400,000) P (600,000)
Income Statement:
Revenues..............................................
P2,100,000 P4,000,000 P4,300,000
1,650,0001
Expenses.............................................. 3,000,000 3,200,000
Net income............................................
P 450,000 P1,000,000 P1,100,000
8 Chapter 7

Statement of Owners Equity:

Beginning owners equity...................... P 300,000 P 300,000 P 600,000
+ Investments by owner........................ 0 100,000 y3
+ Net income......................................... x1 1,000,000 1,100,000
Withdrawals by owner........................ (400,000) (700,000) (1,000,000)
= Ending owners equity........................ P 350,000 P 700,000 P 900,000

___________
1
Net income (x) = P450,000

Revenues expenses
= net income

P2,100,000 expenses
= P450,000

Expenses = P1,650,000
2
Assets liabilities = OE

Assets P800,000 = P700,000

Assets = P150,000
3
P600,000 + Investments (y) +
P1,100,000 P1,000,000 = P900,000

Investments = P200,000

Exercise 22

Requirement (1)

Classification of Events

Feb. 4 C 11 C
5 A 12 B
6 A 18 A
7 A 25 A
10 C 28 A

Requirement (2)
 Analyzing and Summarizing Business Transactions of a Service Entity 9

OWNERS
ASSETS LIABILITIES EQUITY
Type of
Lorenzo Owners
Accounts Office Accounts Cabrera, Equity
Date Cash Receivable Supplies Furniture Payable Capital Transaction
Feb. 4*
5 600,000 600,000 Owner
investment
Bal. 600,000 600,000
6 (3,000) 3,000
Bal. 597,000 3,000 600,000
7 70,000 70,000
Bal. 597,000 3,000 70,000 70.000 600,000
10*
11*
12*
18 40,000 40,000 Service
revenue
Bal. 597,000 40,000 3,000 70,000 70,000 640,000
25 (10,000) (10,000) Rent expense
Bal. 587,000 40,000 3,000 70,000 70,000 630,000
28 (20,000) (20,000) Withdrawal
Bal. 567,000 40,000 3,000 70,000 70,000 610,000
______
* Not a transaction of the business.

Exercise 23

Requirement (1)

Mitch Chua, Realtor

Balance Sheet
November 30, 2007

ASSETS LIABILITIES

Cash P 120,000 Accounts payable P 60,000

Office supplies 10,000 Note payable 850,000
Franchise 200,000 Total liabilities P 910,000
Furniture 170,000 OWNERS EQUITY
Land 1,400,000 Mitch Chua, capital 990,000
Total liabilities and
Total assets P1,900,000 owners equity P1,900,000

Requirement (2)
Personal items not reported on the balance sheet of the business:
c. Personal residence (P1,700,000) and mortgage payable (P1,200,000)
d. Personal cash (P100,000)
e. Personal accounts payable (P18,000)
Exercise 24
10 Chapter 7

Requirement (1)
Lua Lim, Realtor
Balance Sheet
March 31, 2007

ASSETS LIABILITIES
Cash P 90,000 Accounts payable P 60,000
Office supplies 10,000 Note payable 330,000
Franchise 150,000 Total liabilities P 390,000
Furniture 120,000 OWNERS EQUITY
Land 700,000 Mitch Chua, capital 680,000
Total liabilities and
Total assets P1,070,000 owners equity P1,070,000

Requirement (2)
Personal items not reported on the balance sheet of the business:
a. Personal cash (P50,000)
b. Personal residence (P900,000) and mortgage payable (P650,000)
f. Personal account payable (P9,500)

Exercise 25

Owners
+ Assets = Liabilities Equity
Accounts Office Account
+ =+ Receivabl Equipmen Notes s Share
+ + Cash e Trucks t Payable Payable Capital
Dec. 31
Balances P 95,000 P 89,000 P580,000 P 38,000 P200,000 P 52,000 P550,000
(1) 27,000 + 27,000
P 68,000 P 89,000 P580,000 P 65,000 P200,000 P 52,000 P550,000
(2) + 40,000 + 40,000
P108,000 P 49,000 P580,000 P 65,000 P200,000 P 52,000 P550,000
(3) 32,000 32,000
P 76,000 P 49,000 P580,000 P 65,000 P200,000 P 20,000 P550,000
(4) +100,000 +100,000
P176,000 P 49,000 P580,000 P 65,000 P300,000 P 20,000 P550,000
(5) 150,000 + 305,000 +155,000
P 26,000 P 49,000 P885,000 P 65,000 P455,000 P 20,000 P550,000
(6) +200,000 +200,000
Balances P226,000 P 49,000 P885,000 P 65,000 P455,000 P 20,000 P750,000
 Analyzing and Summarizing Business Transactions of a Service Entity 11

Multiple Choice Questions

1. a 6. d 11. b 16. d 21. c

2. c 7. c 12. a 17. c 22. b
3. a 8. b 13. c 18. b 23. c
4. d 9. c 14. a 19. d 24. a
5. b 10. d 15. c 20. d 25. d

Test Material

Test Material 7-1

Description of transactions:

a. Purchased equipment for cash at a cost of P3,200.

b. Received P900 cash from collection of accounts receivable.

c. Purchased equipment at a cost of P13,500; paid P3,500 cash as down

payment and incurred a liability (account payable) for the remaining P10,000.

d. Paid P14,500 of accounts payable.

e. P15,000 cash was received from the sale of capital stock.

f. Purchased equipment on account for P2,100.

 Analyzing and Summarizing Business Transactions of a Service Entity 12

Test Material 7-2

Owners Equity
Assets = +Liabilities
Office Notes Accounts
+ +
Cash +
Land Building Equipment += Payable+ Payable Share Capital

Dec. 31 Balances P 370,000 P 950,000 P1,250,000 P512,500 P 800,000 P282,500 P2,000,000

(1) + 250,000 + 250,000

Balances P 620,000 P 950,000 P1,250,000 P512,500 P 800,000 P282,500 P2,250,000

(2) 225,000 + 350,000 + 550,000 + 675,000

Balances P 395,000 P1,300,000 P1,800,000 P512,500 P1,475,000 P282,500 P2,250,000

(3) + 85,000 + 100,000 + 85,000

Balances P1,300,000 P1,800,000 P597,500 P1,575,000 P367,500 P2,250,000

(4) + 100,000

Balances P 495,000 P1,300,000 P1,800,000 P597,500 P1,575,000 P367,500 P2,250,000

(5) + 282,500 282,500

Balances P 212,500 P1,300,000 P1,800,000 P597,500 P1,575,000 P 85,000 P2,250,000

13 Chapter 7

Test Material 7-3

Requirement (1)

Analysis of Transactions

OWNERS
ASSETS LIABILITIES EQUITY
Type of
Katrina Owners
Accounts Accounts Morales, Equity
Date Cash Receivable Supplies Land Payable Capital Transaction
Bal. 12,500 15,000 120,000 80,000 67,500
a) 200,000 200,000 Owner investment
Bal. 212,500 15,000 120,000 80,000 267,500
b) 7,000 7,000 Service revenue
Bal. 219,500 15,000 120,000 80,000 274,500
c) (80,000) (80,000)
Bal. 139,500 15,000 120,000 274,500
d) 10,000 10,000
Bal. 139,500 15,000 10,000 120,000 10,000 274,500
e) 10,000 (10,000)
Bal. 149,500 5,000 10,000 120,000 10,000 274,500
f) 10,000 10,000 Owner investment
Bal. 159,500 5,000 10,000 120,000 10,000 284,500
g) 24,000 24,000 Service revenue
Bal. 159,500 29,000 10,000 120,000 10,000 30,850
h) (10,000) (9,000) Rent expense
(1,000) Advertising exp.
Bal. 149,500 29,000 10,000 120,000 10,000 298,500
i) 1,500 (1,500)
Bal. 151,000 29,000 8,500 120,000 10,000 298,500
j) (18,000) (18,000) Owner withdrawal

Balance 133,000 29,000 8,500 120,000 10,000 280,500

Requirement (2)

Morales Interiors
Income Statement
For the Month Ended September 30, 2007

Revenues:
Service revenue (P7,000 + P24,000) P31,000
Expenses:
Rent expense P9,000
Advertising expense 1,000
Total expenses 10,000
Net income P21,000

Requirement (3)
14 Chapter 7

Morales Interiors
Statement of Owners Equity
For the Month Ended September 30, 2007

Katrina Morales, capital, August 31, 2007 P 67,500

Add: Investments by owner (P200,000 + P10,000) 210,000
Net income for the month 21,000
P298,500
Less: Withdrawals by owner 18,000
Katrina Morales, capital, September 30, 2007 P280,500

Requirement (4)

Morales Interiors
Balance Sheet
September 30, 2007

ASSETS LIABILITIES

Cash P 133,000 Accounts payable P 10,000

Accounts receivable 29,000
Supplies 8,500 OWNERS EQUITY
Land 120,000 Katrina Morales, capital 280,500
Total liabilities and
Total assets P290,500 owners equity P290,500

Requirements (5) and (6)

Learning this material will help you manage a business by:

1. Showing you how to account for the two sides of every transaction.
2. Showing you how to prepare the financial statements in order to measure
how well the business performed (net income or net loss) and where it
stands financially (assets, liabilities, and owners equity).

Note: Students may answer in various other ways. There is no single correct
answer.