Solution manual accounting 21e by warreni ch 02

CHAPTER ANALYZING TRANSACTIONS CLASS DISCUSSION QUESTIONS An account is a form designed to record changes in a particular asset, liability, owner's equity, revenue, or expense A ledger is a group of related accounts The terms debit and credit may signify either an increase or decrease, depending upon the nature of the account For example, debits signify an increase in asset and expense accounts but a decrease in liability, owner's capital, and revenue accounts Liabilities and owner's equity both have rights or claims to assets as indicated by the accounting equation, Assets = Liabilities + Owner's Equity Therefore, the same rules of debit and credit apply to both liabilities and owner's equity a Decrease in owner's equity b Increase in expense a Increase in owner's equity b Increase in revenue a Assuming no errors have occurred, the credit balance in the cash account resulted from drawing checks for $3,000 in excess of the amount of cash on deposit b The $3,000 credit balance in the cash account as of August 31 is a liability owed to the bank It is usually referred to as an "overdraft" and should be classified on the balance sheet as a liability a The revenue was earned in May b (1) Debit Accounts Receivable and credit Fees Earned or another appropriately titled revenue account in May (2) Debit Cash and credit Accounts Receivable in June The trial balance is a proof of the equality of the debits and the credits in the ledger No Errors may have been made that had the same erroneous effect on both debits and credits, such as failure to record and/or post a transaction, recording the same transaction more than once, and posting a 10 11 12 13 41 transaction correctly but to the wrong account The listing of $18,590 is a transposition; the listing of $720 is a slide a No Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance b Yes The trial balance would not balance The error would cause the credit total of the trial balance to exceed the debit total by $270 a The equality of the trial balance would not be affected b On the income statement, total operating expenses (salary expense) would be overstated by $7,500, and net income would be understated by $7,500 On the statement of owner’s equity, the beginning and ending capital would be correct However, net income and withdrawals would be understated by $7,500 These understatements offset one another, and, thus, ending owner’s equity is correct The balance sheet is not affected by the error a The equality of the trial balance would not be affected b On the income statement, revenues (fees earned) would be overstated by $25,000, and net income would be overstated by $25,000 On the statement of owner’s equity, the beginning capital would be correct However, net income and ending capital would be overstated by $25,000 The balance sheet total assets is correct However, liabilities (notes payable) is understated by $25,000, and owner’s equity is overstated by $25,000 The understatement of liabilities is offset by the overstatement of owner’s equity, and, thus, total liabilities and owner’s equity is correct 14 The preferred procedure is to journalize and post a correcting entry debiting Accounts Receivable and crediting Accounts Payable 15 a From the viewpoint of Kennon Storage, the balance of the checking account represents an asset b From the viewpoint of Livingston Savings Bank, the balance of the checking account represents a liability 42 EXERCISES Ex 2–1 Balance Sheet Accounts Income Statement Accounts Assets Flight Equipment Purchase Deposits for Flight Equipment* Spare Parts and Supplies Revenue Cargo and Mail Revenue Passenger Revenue Expenses Aircraft Fuel Expense Commissions*** Landing Fees**** Liabilities Accounts Payable Air Traffic Liability** Owner's Equity None * ** *** **** Advance payments on aircraft purchases Passenger ticket sales not yet recognized as revenue Commissions paid to travel agents Fees paid to airports for landing rights Ex 2–2 Account Number 21 12 11 31 32 41 13 53 52 51 Account Accounts Payable Accounts Receivable Cash Corey Krum, Capital Corey Krum, Drawing Fees Earned Land Miscellaneous Expense Supplies Expense Wages Expense 43 Ex 2–3 Balance Sheet Accounts 11 12 13 14 15 Assets Cash Accounts Receivable Supplies Prepaid Insurance Equipment 21 22 Liabilities Accounts Payable Unearned Rent 31 32 Owner's Equity Millard Fillmore, Capital Millard Fillmore, Drawing Income Statement Accounts 41 Revenue Fees Earned 51 52 53 59 Expenses Wages Expense Rent Expense Supplies Expense Miscellaneous Expense Note: The order of some of the accounts within the major classifications is somewhat arbitrary, as in accounts 13–14 and accounts 51–53 In a new business, the order of magnitude of balances in such accounts is not determinable in advance The magnitude may also vary from period to period Ex 2–4 a and b Transaction Account Debited Type Effect (1) (2) (3) asset asset asset + + + (4) (5) (6) (7) (8) (9) expense asset liability asset drawing expense + + – + + + Account Credited Type Effect owner's equity asset asset liability asset revenue asset asset asset asset 44 + – – + – + – – – – Ex 2–5 (1) (2) (3) (4) (5) (6) (7) (8) (9) Cash Ira Janke, Capital 40,000 Supplies Cash 1,800 Equipment Accounts Payable Cash 24,000 Operating Expenses Cash 3,050 Accounts Receivable Service Revenue 12,000 Accounts Payable Cash 7,500 Cash Accounts Receivable 9,500 Ira Janke, Drawing Cash 5,000 Operating Expenses Supplies 1,050 40,000 1,800 15,000 9,000 3,050 12,000 7,500 9,500 5,000 1,050 Ex 2–6 MALTA CO Trial Balance February 28, 2006 Cash Accounts Receivable Supplies Equipment Accounts Payable Ira Janke, Capital Ira Janke, Drawing Service Revenue Operating Expenses 45 23,150 2,500 750 24,000 7,500 40,000 5,000 12,000 4,100 59,500 59,500 Ex 2–7 debit and credit (c) debit and credit (c) debit and credit (c) credit only (b) debit only (a) debit only (a) debit only (a) Ex 2–8 a b c d Liability—credit Asset—debit Asset—debit Owner's equity (Cindy Yost, Capital)—credit e Owner's equity (Cindy Yost, Drawing)—debit f g h i j Revenue—credit Asset—debit Expense—debit Asset—debit Expense—debit g h i j k l debit debit debit credit debit credit Ex 2–9 a b c d e f credit credit debit credit debit credit Ex 2–10 a Debit (negative) balance of $1,500 ($10,500 – $4,000 – $8,000) Such a negative balance means that the liabilities of Seth’s business exceed the assets b Yes The balance sheet prepared at December 31 will balance, with Seth Fite, Capital, being reported in the owner’s equity section as a negative $1,500 46 Ex 2–11 a The increase of $28,750 in the cash account does not indicate earnings of that amount Earnings will represent the net change in all assets and liabilities from operating transactions b $7,550 ($36,300 – $28,750) Ex 2–12 a $40,550 ($7,850 + $41,850 – $9,150) b $63,000 ($61,000 + $17,500 – $15,500) c $20,800 ($40,500 – $57,700 + $38,000) Ex 2–13 2005 Aug 12 20 25 30 31 31 Rent Expense Cash 1,500 Advertising Expense Cash 700 Supplies Cash 1,050 Office Equipment Accounts Payable 7,500 Cash Accounts Receivable 3,600 Accounts Payable Cash 1,150 Gayle McCall, Drawing Cash 1,000 Miscellaneous Expense Cash 500 Utilities Expense Cash 195 Accounts Receivable Fees Earned 10,150 Utilities Expense Cash 380 47 1,500 700 1,050 7,500 3,600 1,150 1,000 500 195 10,150 380 Ex 2–14 a JOURNAL Date 2006 Oct 27 Page 43 Post Ref Description Supplies Accounts Payable Purchased supplies on account Debit 15 21 Credit 1,320 1,320 b., c., d Supplies 15 Date 2006 Oct 27 Item Balance Post Ref  43 Dr Cr 1,320 Balance Dr Cr 585 1,905 Accounts Payable 2006 Oct 27 Balance 21  43 48 1,320 6,150 7,470 Ex 2–15 a (1) (2) (3) (4) Accounts Receivable Fees Earned 12,190 Supplies Accounts Payable 1,250 Cash Accounts Receivable 9,150 Accounts Payable Cash 750 12,190 1,250 9,150 750 b (3) Cash 9,150 (4) (2) Supplies 1,250 (1) Accounts Receivable 12,190 (3) (4) 750 9,150 49 Accounts Payable 750 (2) 1,250 Fees Earned (1) 12,190 Ex 2–16 HALEAKALA PARK CO Trial Balance March 31, 2006 Cash Accounts Receivable Supplies Prepaid Insurance Land Accounts Payable Unearned Rent Notes Payable Neil Orzeck, Capital Neil Orzeck, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Expense 17,450 37,500 2,100 3,000 85,000 18,710 9,000 40,000 86,640 20,000 310,000 175,000 60,000 41,500 7,900 6,000 8,900 464,350 464,350 Ex 2–17 Inequality of trial balance totals would be caused by errors described in (b) and (d) 50 Prob 2–4B Concluded BOOMERANG REALTY Trial Balance November 30, 2006 Cash Accounts Receivable Prepaid Insurance Office Supplies Land Accounts Payable Unearned Rent Notes Payable Drew Felkel, Capital Drew Felkel, Drawing Fees Earned Salary and Commission Expense Rent Expense Advertising Expense Automobile Expense Miscellaneous Expense 84 25,060 93,900 7,000 3,375 90,000 15,195 2,000 80,000 68,680 9,500 301,400 171,500 37,000 19,850 6,600 3,490 467,275 467,275 Prob 2–5B Totals of preliminary trial balance: Debit Credit $59,291.40 $45,229.20 $14,062.20 Difference between preliminary trial balance totals: Errors in trial balance: (a) Land debit balance was listed as $26,265.00 instead of $26,625.00 (b) Accounts Payable credit balance of $1,077.50 was listed as debit balance (c) Advertising Expense of $275.00 was omitted Errors in account balances: (a) Shelly Felix, Drawing, balance of $1,350.00 was totaled as $1,500.00 Errors in posting: (a) Rent Expense entry of July for $1,540.00 was posted as $15,400.00 (slide) (b) Cash entry of July 15 for $1,785.50 was posted as $1,875.50 (transposition) (c) Service Revenue entry of July 31 for $1,276.10 was posted as $1,726.10 (transposition) (d) Utilities Expense entry of July 30 for $436.60 was posted as $4,366.00 (slide) July 31 Advertising Expense 53 175.00 Cash 11 175.00 CYPRESS TV REPAIR Trial Balance July 31, 20— Cash Supplies Prepaid Insurance Land Notes Payable Accounts Payable Shelly Felix, Capital Shelly Felix, Drawing Service Revenue Wages Expense Utilities Expense Advertising Expense Rent Expense Miscellaneous Expense 85 8,741.00 997.90 395.50 26,625.00 6,500.00 1,077.50 27,760.20 1,350.00 8,000.40 2,518.60 436.60 450.00 1,540.00 283.50 43,338 10 43,338 10 Prob 2–6B MONTERO CARPET Trial Balance October 31, 2006 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Tyca Seagle, Capital Tyca Seagle, Drawing Fees Earned Wages Expense Rent Expense Advertising Expense Gas, Electricity, and Water Expense Miscellaneous Expense 4,000* 8,575 1,540 770 35,000 21,000 5,475 21,825 11,200 76,700 43,540 10,400 4,480 4,400 1,095 125,000 125,000 * $5,200 + $1,500 (a) – $2,700 (b) No The trial balance indicates only that the debits and credits are equal Any errors that have the same effect on debits and credits will not affect the balancing of the trial balance 86 CONTINUING PROBLEM and JOURNAL Date 2006 May 1 3 11 13 14 Page Description Post Ref Cash Shannon Burns, Capital 11 31 3,000 Office Rent Expense Cash 51 11 1,600 Prepaid Insurance Cash 15 11 3,360 Cash Accounts Receivable 11 12 1,200 Cash Unearned Revenue 11 23 4,800 Accounts Payable Cash 21 11 250 Miscellaneous Expense Cash 59 11 150 Office Equipment Accounts Payable 17 21 5,000 Advertising Expense Cash 55 11 200 Cash Fees Earned 11 41 600 Equipment Rent Expense Cash 52 11 500 Wages Expense Cash 50 11 1,200 87 Debit Credit 3,000 1,600 3,360 1,200 4,800 250 150 5,000 200 600 500 1,200 Continuing Problem Continued and JOURNAL Date 2006 May 16 18 21 22 23 27 28 29 30 31 31 31 Page Description Post Ref Cash Fees Earned 11 41 1,100 Supplies Accounts Payable 14 21 750 Music Expense Cash 54 11 240 Advertising Expense Cash 55 11 500 Cash Accounts Receivable Fees Earned 11 12 41 400 1,160 Utilities Expense Cash 53 11 560 Wages Expense Cash 50 11 1,200 Miscellaneous Expense Cash 59 11 170 Cash Accounts Receivable Fees Earned 11 12 41 600 600 Cash Fees Earned 11 41 2,000 Music Expense Cash 54 11 600 Shannon Burns, Drawing Cash 32 11 2,000 88 Debit Credit 1,100 750 240 500 1,560 560 1,200 170 1,200 2,000 600 2,000 Continuing Problem Continued and Cash Date 2006 May 1 1 3 11 13 14 16 21 22 23 27 28 29 30 31 31 31 11 Item Post Ref Dr Cr Balance  1 1 1 1 1 2 2 2 2 2 3,000 1,200 4,800 600 1,100 400 600 2,000 1,600 3,360 250 150 200 500 1,200 240 500 560 1,200 170 600 2,000 Accounts Receivable 2006 May Balance 23 30 Balance Dr Cr 6,160 9,160 7,560 4,200 5,400 10,200 9,950 9,800 9,600 10,200 9,700 8,500 9,600 9,360 8,860 9,260 8,700 7,500 7,330 7,930 9,930 9,330 7,330 12  2 Supplies 2006 May Balance 18 1,200 1,160 600 1,200 — — 1,160 1,760 14  Prepaid Insurance 2006 May 750 170 920 15 89 3,360 3,360 Continuing Problem Continued Office Equipment Date 2006 May 17 Item Post Ref Dr Cr 5,000 Balance Dr Cr 5,000 Accumulated Depreciation—Office Equipment This account is not used in Chapter 18 Accounts Payable 2006 May Balance 18 21  1 250 — 5,000 750 250 — 5,000 5,750 Wages Payable This account is not used in Chapter 22 Unearned Revenue 2006 May 23 Shannon Burns, Capital 2006 May Balance 4,800 4,800 31  Shannon Burns, Drawing 2006 May Balance 31 3,000 7,000 10,000 32  2,000 250 2,250 Income Summary This account is not used in Chapter 33 Fees Earned 2006 May Balance 11 16 23 30 31 41  2 2 90 600 1,100 1,560 1,200 2,000 4,750 5,350 6,450 8,010 9,210 11,210 Continuing Problem Continued Wages Expense Date 2006 May 14 28 50 Item Post Ref Balance  Office Rent Expense 2006 May Balance Dr Cr 1,200 1,200 Balance Dr Cr 400 1,600 2,800 51  Equipment Rent Expense 2006 May Balance 13 1,600 1,000 2,600 52  Utilities Expense 2006 May Balance 27 500 650 1,150 53  Music Expense 2006 May Balance 21 31 560 300 860 54  2 Advertising Expense 2006 May Balance 22 240 600 940 1,180 1,780 55  Supplies Expense 2006 May Balance 200 500 600 800 1,300 56  Insurance Expense This account is not used in Chapter 180 57 91 Continuing Problem Concluded Depreciation Expense Date 58 Post Ref Item Dr Cr Balance Dr Cr This account is not used in Chapter Miscellaneous Expense 2006 May Balance 29 59  150 170 150 300 470 DANCIN MUSIC Trial Balance May 31, 2006 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accounts Payable Unearned Revenue Shannon Burns, Capital Shannon Burns, Drawing Fees Earned Wages Expense Office Rent Expense Equipment Rent Expense Utilities Expense Music Expense Advertising Expense Supplies Expense Miscellaneous Expense 92 7,330 1,760 920 3,360 5,000 5,750 4,800 10,000 2,250 11,210 2,800 2,600 1,150 860 1,780 1,300 180 470 31,760 31,760 SPECIAL ACTIVITIES Activity 2–1 Acceptable ethical conduct requires that Ross look for the difference If Ross cannot find the difference within a reasonable amount of time, he should confer with his supervisor as to what action should be taken so that the financial statements can be prepared by the o'clock deadline Ross’s responsibility to his employer is to act with integrity, objectivity, and due care, so that users of the financial statements will not be misled Activity 2–2 The following general journal entry should be used to record the receipt of tuition payments received in advance of classes: Cash Unearned Tuition Deposits XXXX XXXX Cash is an asset account, and Unearned Tuition Deposits is a liability account As the classes are taught throughout the term, the unearned tuition deposits become earned revenue Activity 2–3 The journal is called the book of original entry It provides a time-ordered history of the transactions that have occurred for the firm This time-ordered history is very important because it allows one to trace ledger account balances back to the original transactions that created those balances This is called an “audit trail.” If the firm recorded transactions by posting ledgers directly, it would be nearly impossible to reconstruct actual transactions The debits and credits would all be separated and accumulated into the ledger balances Once the transactions become part of the ledger balances, the original transactions would be lost That is, there would be no audit trail, and any errors that might occur in recording transactions would be almost impossible to trace Thus, firms first record transaction debits and credits in a journal These transactions are then posted to the ledger to update the account balances The journal and ledger are linked using posting references This allows an analyst to trace the transaction flow forward or backward, depending upon the need 93 Activity 2–4 The rules of debit and credit must be memorized Doris is correct in that the rules of debit and credit could be reversed as long as everyone accepted and abided by the rules However, the important point is that everyone accepts the rules as the way in which transactions should be recorded This generates uniformity across the accounting profession and reduces errors and confusion Since the current rules of debit and credit have been used for centuries, Doris should adapt to the current rules of debit and credit, rather than devise her own The primary reason that all accounts not have the same rules for increases and decreases is for control of the recording process The double-entry accounting system, which includes both (1) the rules of debit and credit and (2) the accounting equation, guarantees that (1) debits always equals credits and (2) assets always equals liabilities plus owner’s equity If all increases in the account were recorded by debits, then the control that debits always equals credits would be removed In addition, the control that the normal balance of assets is a debit would also be removed The accounting equation would still hold, but the control over recording transactions would be weakened Doris is correct that we could call the left and right sides of an account different terms, such as “LE” or “RE.” Again, centuries of tradition dictate the current terminology used One might note, however, that in Latin, debere (debit) means left and credere (credit) means right The accounting system may be designed to capture information about the buying habits of various customers or vendors, such as the quantity normally ordered, average amount ordered, number of returns, etc Thus, in a sense, there can be other “sides” of (information about) a transaction that are recorded by the accounting system Such information would be viewed as supplemental to the basic double-entry accounting system 94 Activity 2–5 a Although the titles and numbers of accounts may differ, depending on how expenses are classified, the following accounts would be adequate for recording transaction data for Eagle Caddy Service: Balance Sheet Accounts 11 12 13 Assets Cash Accounts Receivable Supplies 21 Liabilities Accounts Payable 31 32 Owner's Equity Kercy Hepner, Capital Kercy Hepner, Drawing Income Statement Accounts 41 Revenue Service Revenue 51 52 53 54 55 Expenses Rent Expense Supplies Expense Salary Expense Utilities Expense Miscellaneous Expense b EAGLE CADDY SERVICE Income Statement For Month Ended June 30, 2006 Service revenue Operating expenses: Rent expense Supplies expense Salary expense Utilities expense Miscellaneous expense Total operating expenses Net income $4,450 $1,800 610 390 160 180 3,140 $1,310 Note to Instructors: Students may have prepared slightly different income statements, depending upon the titles of the major expense classifications chosen Regardless of the classification of expenses, however, the total sales, total operating expenses, and net income should be as presented above T accounts are not required for the preparation of the income statement of Eagle Caddy Service The following presentation illustrates one solution using T accounts Alternative solutions are possible if students used different accounts In presenting the following T account solution, instructors may wish to emphasize the advantages of using T accounts (or a journal and four-column accounts) when a large number of transactions must be recorded 95 Activity 2–5 2006 June 15 30 30 3,375 Continued Cash 2006 2,250 June 1,680 2,200 270 6,400 11 17 20 28 30 30 Accounts Receivable 2006 2006 June 25 570 June 30 300 2006 June 22 140 Supplies 2006 225 June 30 270 255 750 Accounts Payable 2006 2006 June 17 270 June 20 375 645 22 255 Kercy Hepner, Capital 2006 June Service Revenue 2006 June 15 25 30 300 225 1,125 270 375 180 160 390 3,025 Rent Expense 2006 June 12 270 13 610 52 53 390 Utilities Expense 2006 June 30 51 610 Salary Expense 2006 June 30 1,680 570 2,200 4,450 300 1,500 1,800 Supplies Expense 2006 June 30 41 54 160 21 Miscellaneous Expense 375 270 255 900 2006 June 28 31 2,250 96 180 55 Activity 2–5 Concluded c $2,250, computed in the following manner: Cash receipts: Initial investment Cash sales Collections on accounts Total cash receipts during June $2,250 3,880 270 Cash disbursements: Rent expense Supplies purchased for cash Salary expense Payment for supplies on account Utilities expense Miscellaneous expense Total cash disbursements during June $1,800 225 390 270 160 180 Cash on hand according to records $6,400 3,025 $3,375* *If the student used T accounts in completing part (b), or this part, this amount ($3,375) should agree with the balance of the cash account d The difference of $195 between the cash on hand according to records ($3,375) and the cash on hand according to the count ($3,180) could be due to many factors, including errors in the record keeping and withdrawals made by Kercy 97 Activity 2–6 From our discussions in Chapter 1, the three possible business strategies that could be used are as follows: low-cost strategy differentiation strategy combination strategy Real world examples of each strategy are as follows: low-cost strategy: Stein Mart, Wal-Mart, Kmart, Costco differentiation strategy: GAP, Limited, Old Navy, Talbots combination strategy: JCPenney, Sears, Dillards The answers will vary among the students groups Normally, venture capital firms demand a large percentage of ownership, which many times is the majority (over 50%) ownership Activity 2–7 Note to Instructors: The purpose of this activity is to familiarize students with the job opportunities available in accounting or in fields that require (or prefer) the employee to have some knowledge of accounting 98 ... While sales increased by $1,103 million, a 3.1% increase, cost of sales increased by $1,547 million, a 5.5% increase Selling, general, and administrative expenses also increased by $901 million, a... 450 (b) 400 Sales Commissions (c) 12,600 2,000 450 1,500 2,075 3,000 9 ,025 605 850 Tim Cochran, Capital (a) 12,000 (f) Tim Cochran, Drawing 1,500 (d) Rent Expense 2,000 (h) Office Salaries Expense... Miscellaneous Expense 375 STAR REALTY Trial Balance March 31, 2006 Cash Supplies Accounts Payable Tim Cochran, Capital Tim Cochran, Drawing Sales Commissions