Processing Accounting Information: Questions

Chapter 2
Processing Accounting Information
Questions
1. The basic summary device of accounting is the account.

It resembles the letter T, and its left side is called the
debit side and its right side the credit side.
2. The statement is false because debit means left and

credit means right. Debits and credits are used to record
increases and decreases in accounts, so debits can be
increases or decreases depending on the type of account
involved, and likewise for credits.
3. The three basic types of accounts are ASSETS,

LIABILITIES, and SHAREHOLDERS’ EQUITY. Two
additional types of accounts are REVENUES and
EXPENSES. They are most closely related to
shareholders’ equity; revenues increase shareholders’
equity and expenses decrease shareholders’ equity.
4. Transactions are events that affect the financial position

of the entity and that may be reliably recorded. They are
the raw material of accounting. Without transactions,
there would be nothing to account for.
5. Business → Source → Transaction → Entry → Posting to

Transaction Documents Analysis Journal Ledger
66 Financial Accounting Canadian Edition Instructor’s Solutions Manual

6. 1 a. Issuance of shares
1 b. Revenue transaction
0 c. Purchase of supplies on credit
2 d. Expense transaction
0 e. Cash payment on account
2 f. Dividends
0 g. Borrowing money on a note payable
1 h. Sale of service on account
7. Cash Common Shares

Accounts Receivable Sales Revenue
Notes Payable Salary Expense
8. “Accounts Payable has a credit balance of $1,700” means

that the entity owes $1,700 to its creditors on a debt that
is not evidenced by a formal note payable.
9. The two business transactions are (1) Brown’s providing

laundry service and earning revenue and (2) Baylor’s
paying cash to Brown. Brown’s earning the revenue
increases the shareholders’ equity of the entity, and
Baylor’s payment of cash increases Brown’s cash.
10. Accountants prepare a trial balance to determine whether

the total debits equal the total credits.
11. The normal balance of an account is the side of the

account—debit or credit—that records an increase. Also,
an account’s normal balance is the side of the account
that usually has the account’s balance.
Chapter 2 Processing Accounting Information 67

12. Account Type Normal Balance
Assets Debit
Liabilities Credit
Shareholders’ equity Credit
Revenues Credit
Expenses Debit
13. This error does not cause the trial balance to be out of
balance because both the total debits and the total
credits are overstated by the same amount, $4,500
($5,000 – $500).
14. Collecting cash on account has no effect on total assets

because the increase in cash, which increases total
assets, is offset by the decrease in accounts receivable,
which decreases total assets.
15. The advantage of “journal-less” transaction analysis is

the saving of time. Transactions are recorded directly in
the ledger without recording them in the journal.

Check Points
(5 min.) CP 2-1
Nelson’s payment was a transaction of the business, which,
however, was not an expense.
Nelson acquired an asset, Equipment, because the equipment

is an economic resource of the business.
(5 min.) CP 2-2
a. $56,300
b. $12,800
c. $3,000
d. $5,800 [Service revenue of $8,500 ($5,500 + $3,000) – Total
expenses of $2,700 ($1,100 + $1,200 + $400) = Net income of
$5,800]
e. $500

(5-10 min.) CP 2-3
Cash Accounts Receivable
22,000 4,000 1,000
2,000 Bal. 1,000
Bal. 20,000
(5 min.) CP 2-4
Increased total assets: May 1 (Cash)
May 1 (Medical supplies)
May 3–10 (Cash, Accounts
receivable)
Decreased total assets: May 2 (Cash)

(10 min.) CP 2-5
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Apr. 15 Cash.................................................... 20,000

Note Payable.................................. 20,000
Borrowed money from the bank.
22 Accounts Receivable........................ 4,000

Service Revenue ........................... 4,000
Performed service on account.
28 Cash.................................................... 1,000
Accounts Receivable.................... 1,000
Received cash on account.
29 Utilities Expense ............................... 200

Accounts Payable ......................... 200
Received utility bill.
30 Salary Expense ................................. 3,000

Cash................................................ 3,000
Paid salary expense.
30 Interest Expense ............................... 300

Cash................................................ 300
Paid interest expense.

(10-15 min.) CP 2-6
Req. 1
Journal
Supplies................................................ 1,500
Accounts Payable .......................... 1,500
Purchased supplies on account.
Accounts Payable ............................... 500

Cash ................................................. 500
Paid cash on account.
Req. 2
Accounts Payable
500 1,500
Bal. 1,000
Req. 3
Kumar’s business owes $1,000, as shown in the Accounts

Payable account.

(10-15 min.) CP 2-7
Req. 1
Journal
Accounts Receivable........................ 800

Service Revenue .......................... 800
Cash.................................................... 500
Accounts 500
Receivable……………..
Req. 2
Cash Accounts Receivable Service Revenue

500 800 500 800
Bal. 500 Bal. 300 Bal. 800
Req. 3
a. The Centre earned $800: Service Revenue
b. Total assets $800: Cash .............................. $500

Accounts receivable.... 300
Total assets .................. $800

(10 min.) CP 2-8
Roots Canada Ltd.
Trial Balance
December 31, 2004
ACCOUNT DEBIT CREDIT
Millions
Cash ......................................... $ 30
Other assets............................ 100
Accounts payable................... $ 10
Other liabilities........................ 50
Shareholders’ equity.............. 30
Revenues................................. 300
Expenses ................................. 260 ___
Total ......................................... $390 $390
Roots’ net income: $40 million ($300 – $260)
(10 min.) CP 2-9

1. Total assets = $53,800 ($33,300 + $2,000 + $500 +
$18,000)
2. Total liabilities = $100
3. Total shareholders’ equity = $53,700 ($53,800 – $100)
4. Net income = $5,800 ($8,500 – $1,100 – $1,200 – $400)

10 min.) CP 2-10
1. Total debits = $76,600 ($58,600 + $20,000 – $2,000)
Total credits = $58,600
Difference = $18,000 ($76,600 – $58,600)
$18,000 / 9 = $2,000 (original amount of accounts
receivable)
2. Total debits = $121,600 ($58,600 + $81,000 – $18,000)

Total credits = $ 58,600
Difference = $ 63,000 ($121,600 – $58,600)
$63,000 / 9 = $7,000 (an integer), which suggests either a
transposition or a slide
3. Total debits = $56,600 ($58,600 – $2,000)

Total credits = $60,600 ($58,600 + $2,000)
Difference = $ 4,000 ($60,600 – $56,600)
$4,000 / 2 = $2,000 (original amount of accounts receivable)

(10 min.) CP 2-11
D 1. Ledger A. Using up assets in the
course of operating a
J 2. Posting business
I 3. Normal balance B. Always a liability
B 4. Payable C. Revenues – Expenses
F 5. Journal D. Grouping of accounts
G 6. Receivable E. Assets – Liabilities
E 7. Owners’ equity F. Record of transactions
H 8. Debit G. Always an asset
A 9. Expense H. Left side of an account
C 10. Net income I. Side of an account where

increases are recorded
J. Copying data from the

journal to the ledger

(5 min.) CP 2-12
Cash Equipment
500,000 200,000
Accounts Payable Common Shares

200,000 500,000
Total debits = $700,000 ($500,000 + $200,000)
Total credits = $700,000 ($200,000 + $500,000)

Exercises
(10-15 min.) E 2-1

TO: Home Office
FROM: Keith Farris, Store Manager
During the first week, I borrowed $320,000 on a note payable. I

used the store’s beginning cash plus the borrowed money to
purchase land, a building, equipment, and supplies. After all
these transactions, the store’s balance sheet appears as
follows:
Discount Tire Company Ltd.

Gander Store
Balance Sheet
Date
ASSETS LIABILITIES
Cash $ 30,000* Note payable $320,000
Supplies 40,000
Equipment 100,000 SHAREHOLDERS’ EQUITY
Land 70,000 Common shares 40,000
Building 120,000 Total liabilities and
Total assets $360,000 shareholders’ equity $360,000
79
_____
*$40,000 + $320,000 – $70,000 – $120,000 – $100,000 – $40,000 =
$30,000

(5-10 min.) E 2-2
a. Purchase of asset on account
Borrow money
b. Purchase of asset for cash
Sale of asset for cash
Collection of an account receivable
c. Payment of dividends to owners
Expense transaction
d. Pay a liability
e. Issuance of shares
Revenue transaction
(Answers will vary.)
(10-15 min.) E 2-3

a. 1. Increased assets (cash)
b. 3. No effect on total assets. Increase in land offsets the
decrease in cash.
c. 1. Increased assets (cash)
d. 2. Decreased assets (cash)
e. 1. Increased assets (machinery and equipment)
f. 1. Increased assets (accounts receivable)
g. 2. Decreased assets (cash)
h. 3. No effect on total assets. Increase in cash offsets the
decrease in accounts receivable.
i. 3. No effect (a personal transaction)
j. 3. No effect on total assets. Increase in cash offsets the
decrease in land.

(10-20 min.) E 2-4
Req. 1
Veterinary Clinic Ltd.
Analysis of Transactions
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Accounts Veterinary Accounts Note Common Retained Type of Shareholders’
Date Cash + Receivable + Supplies + Land = Payable + Payable + Shares + Earnings Equity Transaction
Oct. 6 35,000 35,000 Issued shares
9 (15,000) 15,000
12 2,000 2,000
15 Not a transaction of the business.
15-31 4,000 4,000 8,000 Service revenue
15-31 (1,400) (1,400) Salary expense
(1,000) (1,000) Rent expense
(300) (300) Utilities expense
31 500 (500)
31 10,000 10,000
31 (1,500) _____ (1,500)
Bal. 30,300 4,000 1,500 15,000 500 10,000 35,000 5,300
50,800 50,800

(continued) E 2-4
Req. 2
a. $50,800
b. $4,000
c. $10,500 ($500 + $10,000)
d. $5,300 (Revenue, $8,000 minus total expenses of $2,700,

equals net income, $5,300.)

(10-15 min.) E 2-5
Journal
Oct. 6 Cash................................................................... 35,000

Common Shares .......................................... 35,000
Issued shares to owner.
9 Land................................................................... 15,000
Cash .............................................................. 15,000
Purchased land.
12 Veterinary Supplies .......................................... 2,000

Accounts Payable........................................ 2,000
15 Not a transaction of the business.
15-31 Cash................................................................... 4,000

Accounts Receivable ....................................... 4,000
Service Revenue .......................................... 8,000
Performed service for cash and on account.
15-31 Salary Expense ................................................. 1,400

Rent Expense.................................................... 1,000
Utilities Expense............................................... 300
Cash .............................................................. 2,700
Paid expenses.
31 Cash................................................................... 500
Veterinary Supplies ..................................... 500
Sold supplies.
31 Cash................................................................... 10,000
Note Payable ................................................ 10,000
Borrowed money.
31 Accounts Payable............................................. 1,500

Cash .............................................................. 1,500
Paid on account.

(10-15 min.) E 2-6
Req. 1
Cash balance = $4 million ($100 – $70 – $55 + $30 + $20 – $21)
Req. 2
Company owes $36 million [$60 – $55 + $30 + ($22 – $21)]
Req. 3
Net loss = $2 million ($20 – $22)

(10-20 min.) E 2-7
Req. 1 (journal entries)
Journal
Aug. 1 Cash ............................................................. 18,000

Common Shares..................................... 18,000
Issued common shares to owner.
2 Office Supplies ........................................... 800

Accounts Payable .................................. 800
Purchased office supplies on account.
4 Land ............................................................. 14,000

Cash......................................................... 14,000
Paid cash for land.
6 Cash ............................................................. 2,000

Service Revenue..................................... 2,000
Performed services for cash.
9 Accounts Payable....................................... 100

Cash......................................................... 100
17 Accounts Receivable ................................. 1,200

Service Revenue..................................... 1,200
23 Cash ............................................................. 1,200

Accounts Receivable ............................. 1,200
30 Salary Expense ........................................... 1,000

Rent Expense.............................................. 500
Cash......................................................... 1,500
Paid cash expenses.
(continued) E 2-7
Req. 2
Ending cash = $5,600

($18,000 – $14,000 + $2,000 – $100 + $1,200 – $1,500)
Expects to collect on account = $0 ($1,200 – $1,200)
Total liabilities = $700 ($800 – $100)
Net income (profit) = $1,700 ($2,000 + $1,200 – $1,000 – $500)

(20-30 min.) E 2-8
Req. 1

Aug. 1 18,000 Aug. 4 14,000 Aug. 17 1,200 Aug. 23 1,200
6 2,000 9 100 Aug. 31 -0-
23 1,200 30 1,500
Aug. 31 5,600
Office Supplies Land

Aug. 2 800 Aug. 4 14,000
Aug. 31 800 Aug. 31 14,000

Aug. 9 100 Aug. 2 800 Aug. 1 18,000
Aug. 31 700 Aug. 31 18,000
Service Revenue Salary Expense

Aug. 6 2,000 Aug. 30 1,000
17 1,200 Aug. 31 1,000
Aug. 31 3,200
Rent Expense
Aug. 30 500
Aug. 31 500

(continued) E 2-8
Req. 2
Computex Learning Systems Inc.

Trial Balance
August 31, 2005
Cash........................................ $ 5,600
Accounts receivable ............. 0
Office supplies....................... 800
Land ........................................ 14,000
Accounts payable ................. $ 700
Common shares .................... 18,000
Service revenue..................... 3,200
Salary expense ...................... 1,000
Rent expense ......................... 500
Total ........................................ $21,900 $21,900
Req. 3
Total assets ($5,600 + $800 + $14,000).................... $20,400

Total liabilities ............................................................ (700)
Total shareholders’ equity ($20,400 – $700)........... $19,700

(10-15 min.) E 2-9
Journal
1. Cash.......................................................... 20,000
Common Shares................................. 20,000
Issued common shares.
2. Cash.......................................................... 7,000
Note Payable....................................... 7,000
Borrowed money; signed note payable.
3. Land.......................................................... 31,000
Cash..................................................... 8,000
Note Payable....................................... 23,000
Purchased land by paying cash
and signing a note payable.
4. Supplies ................................................... 600

Accounts Payable .............................. 600
5. Cash.......................................................... 100
Supplies .............................................. 100
Sold supplies for cash.
6. Equipment................................................ 6,000
Cash..................................................... 6,000
Paid cash for equipment.
7. Accounts Payable ................................... 300

Cash..................................................... 300
Cash balance = $12,800 ($20,000 + $7,000 + $100 – $8,000 – $6,000 – $300)

Company owes $30,300 ($600 – $300 + $7,000 + $23,000)

(10-20 min.) E 2-10
Req. 1
Mirvish Appliance Service Ltd.

Trial Balance
May 31, 2004
Cash........................................ $ 9,000
Accounts receivable ............. 15,500
Building .................................. 75,250
Land ........................................ 29,000
Accounts payable ................. $ 4,300
Note payable .......................... 13,000
Common shares .................... 48,800
Retained earnings ................. 57,000*
Dividends ............................... 6,000
Service revenue..................... 22,000
Salary expense ...................... 8,650
Utilities expense.................... 1,400
Delivery expense................... 300
Total ........................................ $145,100 $145,100
*Total debits ($145,100), minus total credits except Retained

Earnings ($88,100), equals Retained Earnings ($57,000).

(continued) E 2-10
Req. 2
Mirvish Appliance Service Ltd.

Income Statement
For the Month Ended May 31, 2004
Service revenue ......................... $22,000
Salary expense .......................... $8,650
Utilities expense ........................ 1,400
Delivery expense ....................... 300
Total expenses........................... 10,350
Net income ................................. $11,650

(15-25 min.) E 2-11
Brandon Auto Paint Ltd.
Trial Balance
February 28, 2005
Cash........................................ $ 4,600*
Accounts receivable ............. 12,600*
Inventory ................................ 17,400
Supplies.................................. 600
Land ........................................ 46,000
Accounts payable ................. $ 4,100*
Common shares .................... 48,300*
Sales revenue ........................ 35,700
Cost of goods sold................ 3,900
Salary expense ...................... 1,700
Rent expense ......................... 800
Utilities expense.................... 500* _______
Total ........................................ $88,100 $88,100
_____
*Explanations:
Cash: $4,200 + $400 = $4,600
Accounts Receivable: $13,000 – $400 = $12,600
Accounts Payable: $3,000 + $1,000 – $100 + $200 = $4,100
Common Shares: $47,900 + $400 = $48,300
Utilities Expense: $300 + $200 = $500

(5-15 min.) E 2-12
(a) 8,000 (b) 1,500 (f) 1,700
(d) 1,800 Bal. 1,700
(e) 400
(g) 2,000
Bal. 2,300
Office Supplies Office Furniture

(c) 800 (a) 12,400
Bal. 800 Bal. 12,400

(e) 400 (c) 800 (a) 20,400
Bal. 400 Bal. 20,400
Dividends Commission Revenue

(g) 2,000 (f) 1,700
Bal. 2,000 Bal. 1,700
Salary Expense Rent Expense

(d) 1,800 (b) 1,500
Bal. 1,800 Bal. 1,500

(10-20 min.) E 2-13
Req. 1
Linda English Insurance Ltd.

Trial Balance
July 31, 2006
Cash........................................ $ 2,300
Office supplies....................... 800
Office furniture ...................... 12,400
Common shares .................... 20,400
Dividends ............................... 2,000
Commission revenue............ 1,700
Salary expense ...................... 1,800
Rent expense ......................... 1,500
Total ........................................ $22,500 $22,500
Req. 2
The business performed poorly during July. The result of

operations was a net loss of $1,600, as shown by the income
statement accounts:
Commission revenue.................................................. $ 1,700

Salary expense ......................... $1,800
Rent expense ............................ 1,500
Total expenses ............................................................ (3,300)
Net income (loss.......................................................... $(1,600)

(20-30 min.) E 2-14
Reqs. 1 and 3

Dec. 2 7,000 Dec. 2 500 Dec. 18 1,700
9 800 3 3,000
12 200
Bal. 4,100
Supplies Equipment
Dec. 5 300 Dec. 3 3,000
Furniture Accounts Payable

Dec. 4 3,600 Dec. 4 3,600
5 300
Bal. 3,900
Common Shares Dividends

Dec. 2 7,000
Service Revenue Rent Expense

Dec. 9 800 Dec. 2 500
18 1,700
Bal. 2,500
Utilities Expense Salary Expense

Dec. 12 200

(continued) E 2-14
Req. 2
Journal
Dec. 2 Cash...................................................... 7,000

Common Shares............................. 7,000
2 Rent Expense ...................................... 500

Cash................................................. 500
3 Equipment............................................ 3,000
Cash................................................. 3,000
4 Furniture............................................... 3,600
Accounts Payable .......................... 3,600
5 Supplies ............................................... 300

Accounts Payable .......................... 300
9 Cash...................................................... 800
Service Revenue ............................ 800
12 Utilities Expense ................................. 200

Cash................................................. 200
18 Accounts Receivable.......................... 1,700

Service Revenue ............................ 1,700

(continued) E 2-14
Req. 4
Tsui Tax Consulting Ltd.

Trial Balance
December 18, 2004
Cash ....................................... $ 4,100
Accounts receivable ............ 1,700
Supplies................................. 300
Equipment ............................. 3,000
Furniture ................................ 3,600
Accounts payable................. $ 3,900
Common shares ................... 7,000
Dividends............................... —
Service revenue .................... 2,500
Rent expense ........................ 500
Utilities expense ................... 200
Salary expense ..................... —
Total ....................................... $13,400 $13,400

(20-40 min.) E 2-15
a. Net income for March 2003 – Given as follows:
Retained Earnings
March dividends 15,800 Feb. 28 Bal. 6,200
March
Net income X = $20,100
Mar. 31 Bal. 10,500
$6,200 + X – $15,800 = $10,500

X = $20,100
b. Total cash paid during March:
Cash
Feb. 28 Bal. 4,600
March receipts 81,200 March payments X = $80,400
Mar. 31 Bal. 5,400
$4,600 + $81,200 – X = $ 5,400

X = $80,400

(continued) E 2-15
c. Cash collections from customers during March:
Accounts Receivable
Feb. 28 Bal. 24,300
March sales
on account 60,500 March collections X = $58,100
Mar. 31 Bal. 26,700
$24,300 + $60,500 – X = $26,700

X = $58,100
d. Cash paid on a note payable during March:
Note Payable
Feb. 28 Bal. 13,900
March March
X = 8,800 payments on note X new borrowing 16,300
Mar. 31 Bal. 21,400
$13,900 + $16,300 – X = $21,400

X = $ 8,800

(20-30 min.) E 2-16
Req. 1
Road Runner Inc.

Trial Balance
December 31, 2005
Cash........................................ $ 4,200
Supplies.................................. 800
Land ........................................ 39,000
Accounts payable ................. $ 5,800
Note payable .......................... 5,000
Common shares .................... 25,000
Retained earnings ................. 7,300
Service revenue..................... 9,100
Salary expense ...................... 3,400
Advertising expense............ 900 _______
Totals ...................................... $50,500 $52,200
Out of balance
by $1,700
The correct balance of Accounts Receivable should be $3,900

($2,200 + $1,700). After this correction, total debits will be
$52,200 ($50,500 + $1,700), the same as total credits.

(continued) E 2-16
Req. 2
Road Runner Inc.

Trial Balance
December 31, 2005
Cash ($4,200 – $400).............................. $ 3,800

Accounts receivable
($2,200 + $1,700 + $7,000) ................. 10,900
Supplies .................................................. 800
Land ($39,000 + $80,000)....................... 119,000
Accounts payable ($5,800 + $2,000) .... $ 7,800
Note payable ($5,000 + $80,000) .......... 85,000
Common shares..................................... 25,000
Retained earnings.................................. 7,300
Service revenue ($9,100 + $7,000) ....... 16,100
Salary expense ($3,400 + $400)............ 3,800
Advertising expense ($900 + $2,000).. 2,900
Totals....................................................... $141,200 $141,200
Req. 3
a. Total assets = $134,500 ($3,800 + $10,900 + $800 +

$119,000).
b. Road Runner is profitable, as indicated by the excess of
revenue ($16,100) over total expenses ($6,700 = $3,800 +
$2,900), which is $9,400.

(10-15 min.) E 2-17
Regina:
Income statement June July
Consulting expense ........... $10,000 $ -0-
Balance sheet June 30 July 31

Cash ..................................... $15,000 $7,000*
Accounts payable............... 10,000 2,000**
Hillcrest:
Income statement June July
Service revenue.................. $10,000 $ -0-
Balance sheet June 30 July 31

Cash ..................................... $ -0- $8,000
Accounts receivable .......... 10,000 2,000**
Explanation:***
Regina’s expense is Hillcrest’s revenue.
Regina’s cash payment is Hillcrest’s cash receipt.
Regina’s account payable is Hillcrest’s account receivable.
__________
*$15,000 – $8,000 = $7,000
**$10,000 – $8,000 = $2,000
***Wording may vary.

Problems
Group A
(15-30 min.) P 2-1A

Dear Nicole,
This trial balance lists the accounts of Mach-1 Inc. along with
their balances at December 31, 2005. The trial balance is an
internal document used by accountants. It is not the same as
a balance sheet and an income statement. The balance sheet
and the income statement are financial statements used by
managers, creditors, and investors for decision making.
The fact that the trial balance is in balance does not mean
that Mach-1 Inc. is a sound company. It merely means that
total debits equal total credits in the company ledger. This
says nothing about the soundness of the business. To
compute Mach-1 Inc.’s net income or net loss for the current
period, subtract total expenses from total revenue. During the
current period, Mach-1 Inc. earned a net income of $29,000
[service revenue of $86,000 minus total expenses of
$57,000($14,000 + $3,000 + $33,000 + $7,000)].
Note: Student responses may vary.

(45-60 min.) P 2-2A
Req. 1
Haas Interiors Inc.
Accounts Accounts Common Retained Type of Shareholders’
Cash + Receivable + Supplies + Land = Payable + Shares + Earnings Equity Transaction
Bal. 1,250 1,500 12,000 8,000 4,000 2,750
a) 9,000 9,000 Issued shares
b) 6,700 6,700 Service revenue
c) (5,000) (5,000)
d) 1,000 1,000
e) 500 (500)
f) 1,000 1,000 Issued shares
g) 2,400 2,400 Service revenue
h) (900) (900) Rent expense
(300) (300) Advertising expense
i) (1,800) ____ ____ (1,800) Dividends
Bal. 10,450 3,400 1,000 12,000 4,000 14,000 8,850
$26,850 $26,850

(continued) P 2-2A
Req. 2
Haas Interiors Inc.

Income Statement
For the Month Ended September 30, 2004
Revenues:
Service revenue ($6,700 + $2,400)... $9,100
Expenses:
Rent expense ..................................... $900
Advertising expense ......................... 300
Total expenses .................................. 1,200
Net income ............................................. $7,900
Req. 3
Haas Interiors Inc.

Statement of Retained Earnings
For the Month Ended September 30, 2004
Retained earnings, August 31, 2004 $ 2,750
Add: Net income for the month 7,900
10,650
Less: Dividends (1,800)
Retained earnings, September 30, 2004 $ 8,850

(continued) P 2-2A
Req. 4
Haas Interiors Inc.

Balance Sheet
September 30, 2004
ASSETS LIABILITIES
Cash.................................. $10,450 Accounts payable.............. $ 4,000
Accounts receivable ....... 3,400 SHAREHOLDERS’
Supplies ........................... 1,000 EQUITY
Land.................................. 12,000 Common shares ................ 14,000
Retained earnings ............. 8,850
Total shareholders’ equity 22,850
Total liabilities and
Total assets...................... $26,850 shareholders' equity...... $26,850

(30-40 min.) P 2-3A
Req. 1
Journal
ACCOUNT TITLES DEBIT CREDIT
a. Cash .................................................... 9,000

Common Shares........................... 9,000
b. Cash .................................................... 6,700

Service Revenue........................... 6,700
c. Accounts Payable ............................. 5,000

Cash ............................................... 5,000
d. Supplies.............................................. 1,000
Accounts Payable ........................ 1,000
e. Cash .................................................... 500

Accounts Receivable ................... 500
f. Cash .................................................... 1,000

Common Shares........................... 1,000
g. Accounts Receivable ........................ 2,400

Service Revenue........................... 2,400
h. Rent Expense..................................... 900

Advertising Expense......................... 300
Cash ............................................... 1,200
i. Dividends ........................................... 1,800

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

(continued) P 2-3A
Reqs. 2 and 3
Accounts
Cash Receivable Supplies Land
1,250 5,000 1,500 500 1,000 12,000
9,000 1,200 2,400
6,700 1,800 3,400
500
1,000
10,450
Accounts Common Retained

Payable Shares Earnings Dividends
5,000 8,000 4,000 2,750 1,800
1,000 9,000
4,000 1,000
14,000
Service Advertising
Revenue Rent Expense Expense
6,700 900 300
2,400
9,100
The balances of all the accounts Cash through Common

Shares agree with the ending balances obtained in Problem
2-2A.

(40-50 min.) P 2-4A
Req. 1
Gerbing and Associates Inc.
Classification of Transactions
Feb. 4 c
5 a
6 a
7 a
10 c
11 c
12 b
18 a
21 a
25 a
28 a

(continued) P 2-4A
Req. 2
Gerbing and Associates Inc.
Type of
Accounts Office Accounts Common Retained Shareholders’
Date Cash + Receivable+ Supplies + Furniture = Payable + Shares + Earnings Equity Transaction
Feb. 4*
5 22,000 22,000 Issued shares
6 (300) 300
7 (10,000) 17,000 7,000
10*
11*
12*
18 4,000 4,000 Service revenue
21 (3,500) (3,500)
25 (1,000) (1,000) Rent expense
28 (2,000) ___ (2,000) Dividends
Bal. 5,200 4,000 300 17,000 3,500 22,000 1,000
$26,500 $26,500
_____
*Not a transaction of the business.
(continued) P 2-4A
Req. 3
a. The business has $5,200 in cash. The cash balance takes

into consideration all amounts received from all sources,
including cash received from the issuance of shares. Share
issuances go into the Common Shares account, which has
nothing to do with Retained Earnings. Retained Earnings,
on the other hand, holds the amounts of the revenues and
expenses, which may or may not be received or paid in
cash. There is therefore no relationship between cash and
retained earnings.
b. The business’s total resources (total assets) are $26,500

($5,200 + $4,000 + $300 + $17,000). The business owes total
liabilities of $3,500, so Gerbing’s ownership interest in the
assets of the business is $23,000 ($26,500 – $3,500, or
$22,000 + $1,000).

(continued) P 2-4A
Req. 4
Journal
Feb. 5 Cash....................................................... 22,000
Common Shares.............................. 22,000
Issued shares to owner.
6 Supplies ................................................ 300

Cash.................................................. 300
Purchased supplies.
7 Office Furniture .................................... 17,000

Cash.................................................. 10,000
Accounts Payable ........................... 7,000
Purchased furniture.
18 Accounts Receivable........................... 4,000

Service Revenue ............................. 4,000
21 Accounts Payable ................................ 3,500

Cash.................................................. 3,500
Paid on account.
25 Rent Expense ....................................... 1,000

Cash.................................................. 1,000
Paid rent.
28 Dividends .............................................. 2,000

Cash.................................................. 2,000
Paid dividend.

(15-20 min.) P 2-5A
Req. 1 (journal entries; explanations not required)
Journal
DATE ACCOUNT TITLES DEBIT CREDIT
May 1 Cash ............................................................. 9,000
Common Shares ..................................... 9,000
5 Rent Expense.............................................. 700

Cash......................................................... 700
9 Land ............................................................. 26,000

Cash......................................................... 1,000
Notes Payable ......................................... 25,000
10 Supplies....................................................... 1,200
Accounts Payable .................................. 1,200
19 Accounts Payable....................................... 1,000

Cash......................................................... 1,000
22 Cash ............................................................. 20,000

Notes Payable ......................................... 20,000
31 Cash ............................................................. 6,000

Accounts Receivable ................................. 5,000
Service Revenue..................................... 11,000
31 Salary Expense ........................................... 2,400

Rent Expense.............................................. 1,500
Utilities Expense......................................... 400
Cash......................................................... 4,300
31 Dividends .................................................... 4,000

Cash......................................................... 4,000

(continued) P 2-5A
Req. 2
Cash: $24,000 ($9,000 – $700 – $1,000 – $1,000 + $20,000 +

$6,000 – $4,300 – $4,000)
Total amount owed: $45,200 ($25,000 + $1,200 – $1,000 +

$20,000)

(50-60 min.) P 2-6A
Journal
Jan. 2 Cash .................................................... 33,000

Common Shares............................ 33,000
3 Supplies.............................................. 500
Furniture............................................. 2,600
Accounts Payable ......................... 3,100
4 Cash .................................................... 1,500

Service Revenue............................ 1,500
7 Land .................................................... 22,000

Cash ................................................ 22,000
11 Accounts Receivable ........................ 800

Service Revenue............................ 800
16 Accounts Payable ............................. 2,600

Cash ................................................ 2,600
17 Utilities Expense................................ 110

Cash ................................................ 110
18 Cash .................................................... 400

Accounts Receivable .................... 400

(continued) P 2-6A
Journal
Jan. 22 Utilities Expense ............................. 130

Cash ............................................. 130
29 Cash.................................................. 1,800
Service Revenue......................... 1,800
31 Salary Expense ............................... 1,300

Cash ............................................. 1,300
31 Dividends ......................................... 2,200

Cash ............................................. 2,200

(continued) P 2-6A
Req. 2 (ledger accounts)

Jan. 2 33,000 Jan. 7 22,000 Jan. 11 800 Jan. 18 400
4 1,500 16 2,600 Bal. 400
18 400 17 110
29 1,800 22 130
31 1,300 Supplies
31 2,200 Jan. 3 500
Bal. 8,360 Bal. 500
Furniture Land
Jan. 3 2,600 Jan. 7 22,000
Bal. 2,600 Bal. 22,000

Jan. 16 2,600 Jan. 3 3,100 Jan. 2 33,000
Bal. 500 Bal. 33,000
Dividends
Jan. 31 2,200
Bal. 2,200
Service Revenue Salary Expense

Jan. 4 1,500 Jan. 31 1,300
11 800 Bal. 1,300
29 1,800
Bal. 4,100
Utilities Expense
Jan. 17 110
22 130
Bal. 240
(continued) P 2-6A
Req. 3
O’Dell Financial Planners Ltd.

Trial Balance
January 31, 2004
Cash........................................ $ 8,360
Accounts receivable ............. 400
Supplies.................................. 500
Furniture................................. 2,600
Land ........................................ 22,000
Common shares .................... 33,000
Dividends ............................... 2,200
Service revenue..................... 4,100
Salary expense ...................... 1,300
Utilities expense.................... 240
Total ........................................ $37,600 $37,600
Req. 4
Total resources (assets) = $33,860 ($8,360 + $400 + $500

+ $2,600 + $22,000)
Amount owed (total liabilities) = $500
Profit (net income) = $2,560 ($4,100 – $1,300 –

$240)

(40-50 min.) P 2-7A
Reqs. 1 and 2

(a) 10,000 (c) 22,000 (g) 1,800 (j) 1,100
(b) 20,000 (e) 1,300 Bal. 700
(f) 500 (h) 100
(j) 1,100 (k) 1,800
(l) 2,600
Bal. 3,800
Office Supplies Transmitting Equipment

(d) 400 (c) 22,000
Bal. 400 Bal. 22,000
Building Accounts Payable

(a) 50,000 (h) 100 (d) 400
Bal. 50,000 (i) 600
Bal. 900
Note Payable Common Shares

(b) 20,000 (a) 60,000
Bal. 20,000 Bal. 60,000
Dividends Service Revenue

(l) 2,600 (f) 500
Bal. 2,600 (g) 1,800
Bal. 2,300

(continued) P 2-7A
Salary Expense Rent Expense
(e) 1,300 (k) 1,000
Bal. 1,300 Bal. 1,000
Advertising Expense Utilities Expense

(k) 800 (i) 600
Bal. 800 Bal. 600

(continued) P 2-7A
Req. 3
Red River CableVision Inc.

Trial Balance
January 31, 2005
Cash .......................................... $ 3,800
Accounts receivable ............... 700
Office supplies......................... 400
Transmitting equipment ......... 22,000
Building .................................... 50,000
Accounts payable.................... $ 900
Note payable ............................ 20,000
Common shares ...................... 60,000
Dividends.................................. 2,600
Service revenue ....................... 2,300
Salary expense ........................ 1,300
Rent expense ........................... 1,000
Advertising expense ............... 800
Utilities expense ...................... 600
Total .......................................... $83,200 $83,200
Req. 4
Total assets = $76,900 ($3,800 + $700 + $400 + $22,000

+ $50,000)
Total liabilities = $20,900 ($900 + $20,000)
Net loss = $1,400 ($2,300 – $1,300 – $1,000 – $800

– $600)
Problems
Group B
(15-30 min.) P 2-1B

Dear Anita,
This trial balance lists the accounts of Salon Adeva Inc., along
with their balances at December 31, 2006. The trial balance is
an internal document used by accountants. It is not the same
as a balance sheet and an income statement. The balance
sheet and the income statement are financial statements used
by managers, creditors, and investors for decision making.
The fact that the trial balance is in balance does not mean
that Salon Adeva Inc. is a sound company. It merely means
that total debits equal total credits in the company ledger. This
says nothing about the soundness of the business. To
compute Salon Adeva Inc.’s net income or net loss for the
current period, subtract total expenses from total revenue. In
this instance, Salon Adeva Inc. had a net income of $35,000
[service revenue of $134,000 minus total expenses of $99,000
($63,000 + $26,000 + $7,000 + $3,000)].
Note: Student responses may vary.

(45-60 min.) P 2-2B
Req. 1
Bow River Designers Inc.
Accounts Accounts Common Retained Type of Shareholders’
Cash + Receivable + Supplies + Land = Payable + Shares + Earnings Equity Transaction
Bal. 1,720 2,240 24,100 5,400 10,000 12,660
a) 42,000 42,000 Issued shares
b) (1,400) (1,400)
c) 4,100 4,100 Service revenue
d) 750 (750)
e) 720 720
f) 5,000 5,000 Service revenue
g) 1,700 1,700 Issued shares
h) (1,200) (1,200) Rent expense
(660) (660) Advertising expense
i) (2,400) ___ (2,400) Dividends
Bal. 44,610 6,490 720 24,100 4,720 53,700 17,500
$75,920 $75,920

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Processing Accounting Information: Questions

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Chapter 2

Processing Accounting Information

1. The basic summary device of accounting is the account.

2. The statement is false because debit means left and

3. The three basic types of accounts are ASSETS,

4. Transactions are events that affect the financial position

5. Business → Source → Transaction → Entry → Posting to

66 Financial Accounting Canadian Edition Instructor’s Solutions Manual

7. Cash Common Shares

8. “Accounts Payable has a credit balance of $1,700” means

9. The two business transactions are (1) Brown’s providing

10. Accountants prepare a trial balance to determine whether

11. The normal balance of an account is the side of the

Chapter 2 Processing Accounting Information 67

14. Collecting cash on account has no effect on total assets

15. The advantage of “journal-less” transaction analysis is

68 Financial Accounting Canadian Edition Instructor’s Solutions Manual

Nelson acquired an asset, Equipment, because the equipment

Chapter 2 Processing Accounting Information 69

Decreased total assets: May 2 (Cash)

70 Financial Accounting Canadian Edition Instructor’s Solutions Manual

Apr. 15 Cash.................................................... 20,000

22 Accounts Receivable........................ 4,000

29 Utilities Expense ............................... 200

30 Salary Expense ................................. 3,000

30 Interest Expense ............................... 300

Chapter 2 Processing Accounting Information 71

Accounts Payable ............................... 500

Kumar’s business owes $1,000, as shown in the Accounts

72 Financial Accounting Canadian Edition Instructor’s Solutions Manual

Accounts Receivable........................ 800

Cash Accounts Receivable Service Revenue

a. The Centre earned $800: Service Revenue

b. Total assets $800: Cash .............................. $500

Chapter 2 Processing Accounting Information 73

Roots’ net income: $40 million ($300 – $260)

(10 min.) CP 2-9

74 Financial Accounting Canadian Edition Instructor’s Solutions Manual

2. Total debits = $121,600 ($58,600 + $81,000 – $18,000)

3. Total debits = $56,600 ($58,600 – $2,000)

Chapter 2 Processing Accounting Information 75

I 3. Normal balance B. Always a liability

B 4. Payable C. Revenues – Expenses

F 5. Journal D. Grouping of accounts

G 6. Receivable E. Assets – Liabilities

E 7. Owners’ equity F. Record of transactions

H 8. Debit G. Always an asset

A 9. Expense H. Left side of an account

C 10. Net income I. Side of an account where

J. Copying data from the

76 Financial Accounting Canadian Edition Instructor’s Solutions Manual

Accounts Payable Common Shares

Total debits = $700,000 ($500,000 + $200,000)

Total credits = $700,000 ($200,000 + $500,000)

Chapter 2 Processing Accounting Information 77

(10-15 min.) E 2-1

FROM: Keith Farris, Store Manager

During the first week, I borrowed $320,000 on a note payable. I

Discount Tire Company Ltd.

78 Financial Accounting Canadian Edition Instructor’s Solutions Manual

(Answers will vary.)

(10-15 min.) E 2-3