Solution manual for financial accounting making the connection 1st edition by spiceland thomas and herrmann

Financial Accounting Making the Connection 1st Edition by Spiceland Chapter The Accounting Information System REVIEW QUESTIONS Question 2-1 External transactions are transactions between the company and a separate economic entity Internal transactions not include an exchange with a separate economic entity Purchasing supplies from a local vendor is classified as an external transaction Question 2-2 Use source documents to identify accounts affected by external transactions Analyze the impact of the transaction on the accounting equation Assess whether the transaction results in a debit or a credit to the account balance Record the transaction Post the transaction to the T-accounts in the general ledger Prepare a trial balance Question 2-3 Dual effect refers to each transaction having at least two effects on the accounting equation If an economic event increases (decreases) one side of the equation, then it also increases (decreases) the other side of the equation by the same amount Question 2-4 Assets = Liabilities + Stockholders’ equity (a) Increase = Increase + No change (b) Decrease = No change + Decrease (c) Increase = No change + Increase (d) No change* = No change + No change * One asset (equipment) increases while another asset (cash) decreases Question 2-5 Jerry is not correct While it is possible for a transaction to increase one account and decrease another, dual effect simply indicates that at least two accounts will always be affected However, the accounting equation must always remain in balance It is not possible for one side of the equation to increase while the other side decreases answers to Review Questions (continued) Question 2-6 Accounts Normal balance Assets Debit Liabilities Credit Stockholders’ equity Credit Revenues Credit Expenses Debit Question 2-7 Jenny is not correct Any account can be debited or credited Since an asset has a normal debit balance, it would be debited when it increases and credited when it decreases Similarly, since a liability has a normal credit balance, it would be credited when it increases and debited when it decreases Question 2-8 Accounts Increase (a) Cash Debit (b) Salaries payable Credit (c) Utilities expense Debit (d) Service revenue Credit Question 2-9 Accounts Decrease* (a) Cash Credit (b) Salaries payable Debit (c) Utilities expense Credit (d) Service revenue Debit * Answers are opposite of those in Question 2-8 answers to Review Questions (continued) Question 2-10 These statements are consistent Retained earnings has three components – revenues, expenses, and dividends Changing the balance of any of these components changes the balance of retained earnings Since expenses are negative components of retained earnings, an increase to an expense decreases retained earnings Question 2-11 A journal provides a chronological record of all transactions affecting a firm A journal entry is used to describe the format for recording a transaction Question 2-12 Date Debit Account Name Account Name (Description of transaction) Credit Amount Amount Question 2-13 In each journal entry, the sum of all amounts debited equals the sum of all amounts credited Question 2-14 (a) Debit Cash 1,200 Service Revenue (Receive cash from providing services) (b) Rent Expense Cash (Pay rent for the current month) (c) Credit 1,200 Debit Credit 500 500 Debit Building 10,000 Notes Payable (Purchase building with note payable) Credit 10,000 answers to Review Questions (continued) Question 2-15 (a) Purchase supplies by paying cash of $20,000 (b) Provide services to customer on account for $30,000 (c) Pay cash on accounts payable of $10,000 Question 2-16 A T-account is an informal means to show the balance in an account The left side is referred to as a debit and the right side is referred to as a credit Question 2-17 Posting is the process of transferring the debit and credit information from the journal to individual accounts in the general ledger (a) Supplies 20,000 (b) Accounts Receivable 30,000 (c) Accounts Payable 10,000 Cash 20,000 Service Revenue 30,000 Cash 10,000 Question 2-18 The general ledger is the collection of all accounts used to record the company’s transactions A chart of accounts is a listing of all account names Question 2-19 A trial balance is a list of all accounts and their balances at a particular date Balance refers to the fact that the sum of the accounts with debit balances should equal the sum of the accounts with credit balances Question 2-20 Not necessarily While total debits equaling total credits is a good indication that all accounts have been appropriately accounted for, the accounts could contain offsetting errors For example, if one account with a debit (credit) balance is understated by the same amount that another account with a debit (credit) balance is overstated, the trial balance will show equal debit and credit totals BRIEF EXERCISES Brief Exercise 2-1 Proper order: (c) Use source documents to identify accounts affected by external transactions (d) Analyze the impact of the transaction on the accounting equation (b) Assess whether the impact of the transaction results in a debit or credit to the account balance (f) Record transactions using debits and credits (a) Post the transaction to the T-account in the general ledger (e) Prepare a trial balance Brief Exercise 2-2 Assets = (a) Increase (Cash ↑) (b) No change = (c) Decrease (Cash ↓) = Liabilities + Stockholders’ Equity = Decrease + (Accounts Payable ↓) Possible (Yes/No) No change No Increase + Increase (Salaries Payable ↑) (Service Revenues ↑) No Change + Decrease (Advertising Expense ↑) No Yes Brief Exercise 2-3 Cash Supplies Prepaid Rent Land Equipment Total Assets $ 6,200 1,600 2,200 8,000 12,000 $ 30,000 Total Liabilities and Stockholders’ Equity Accounts Payable $ 1,200 Wages Payable 3,300 Bank Loan Payable 13,000 Stockholders’ Equity 12,500 $ 30,000 Brief Exercise 2-4 + Stockholders’ Equity Assets = Liabilities (a) +$40,000 = $0 + +$40,000 (b) +$32,000 −$32,000 = $0 + $0 (c) +$25,000 = +$25,000 + $0 (d) −$4,000 = $0 + −$4,000 Brief Exercise 2-5 Account Debit Credit Asset + − Liability − + Common Stock − + Retained Earnings − + Dividend + − Revenue − + Expense + − Brief Exercise 2-6 (a) The balance of an asset account increases with a debit and decreases with a credit (b) The balance of a liability account increases with a credit and decreases with a debit (c) The balance of a stockholders’ equity account increases with a credit and decreases with a debit (d) The balance of a revenue account increases with a credit and decreases with a debit (e) The balance of an expense account increases with a debit and decreases with a credit Brief Exercise 2-7 (a) DebitCredit Equipment 14,000 Notes Payable 14,000 (Purchase equipment with note payable) (b) Supplies Cash (Purchase office supplies for cash) 500 500 (c) Rent Expense Cash (Pay rent for the current month) 700 700 Brief Exercise 2-8 (a) Debit Cash 12,000 Service Revenue (Provide services for cash) Credit 12,000 (b) Prepaid Insurance 3,600 Cash (Purchase prepaid insurance with cash) 3,600 (c) Equipment Cash (Purchase equipment with cash) 15,000 15,000 (d) Cash 20,000 Notes Payable (Obtain bank loan) 20,000 Brief Exercise 2-9 Cash 12,000 3,400 2,500 4,800 7,200 1,400 4,500 Postings on the left side (or debit side) of the cash T-account represent increases to cash, such as receiving cash from customers, selling assets, borrowing money, and issuing stock Postings on the right side (or credit side) of the cash T-account represent decreases to cash, such as paying cash for rent, supplies, equipment, workers’ salaries, utilities, repayment of debt, and dividends Brief Exercise 2-10 Assets = Liabilities + Stockholders’ Equity (a) +$25,000 = $0 + +$25,000 (b) +$15,000 = + $0 (c) −$6,000 = + −$6,000 +$15,000 $0 (a) Debit Credit Cash 25,000 Service Revenue (Provide services for cash) 25,000 (b) Supplies 15,000 Accounts Payable 15,000 (Purchase office supplies on account) (c) Salaries Expense 6,000 Cash 6,000 (Pay salaries for the current month) (a) Cash 25,000 6,000 (c) 19,000 Supplies (b) 15,000 15,000 Service Revenue 25,000 (a) 25,000 Accounts Payable 15,000 (b) 15,000 Salaries Expense (c) 6,000 6,000 Exercise 2-9 Purchase equipment with cash, $8,800 Provide services to customers on account, $3,200 Pay current month’s salaries, $1,900 Receive cash from customers in advance of services, $1,500 Pay dividends to stockholders, $900 Exercise 2-10 February Advertising Expense Cash (Pay advertising for current month) Debit Credit 600 600 February Supplies 1,200 Accounts Payable (Purchase beauty supplies on account) 1,200 February 14 Cash 2,400 Service Revenue (Provide beauty services for cash) 2,400 February 15 Salaries Expense Cash (Pay salaries for current month) 800 800 February 25 Accounts Receivable 900 Service Revenue (Provide beauty services on account) 900 February 28 Utilities Expense Cash (Pay utilities for current month) 200 200 Exercise 2-11 March Debit Cash 16,000 Common Stock (Issue common stock) Credit 16,000 March Cash 8,000 Notes Payable (Obtain bank loan) 8,000 March 10 Equipment 20,000 Cash (Purchase construction equipment for cash) 20,000 March 15 Advertising Expense 1,000 Cash (Purchase advertising for current month) 1,000 March 22 Accounts Receivable 17,000 Service Revenue (Provide construction services on account) 17,000 March 27 Cash 12,000 Accounts Receivable (Receive cash on account) 12,000 March 28 Salaries Expense Cash (Pay salaries for current month) 5,000 5,000 Exercise 2-12 (3) (6) (2) Cash 2,400 9,200 1,000 8,700 1,200 (4) 2,700 (5) Supplies 300 1,800 2,100 Unearned Revenue 200 1,000 (6) 1,200 Advertising Expense (4) 1,200 1,200 Accounts Receivable 3,200 (1) 7,400 9,200 (3) 1,400 Accounts Payable 2,500 (5) 2,700 1,800 (2) 1,600 Service Revenue 7,400 (1) 7,400 Exercise 2-13 Sooner Company Trial Balance April 30 Accounts Debit Cash $ 2,900 Accounts Receivable 5,100 Prepaid Rent 6,400 Land 50,000 Accounts Payable Unearned Revenue Common Stock Retained Earnings Service Revenue Supplies Expense 8,400 Salaries Expense 7,200 Totals $ 80,000 Credit $ 3,300 1,800 30,000 20,500 24,400 $ 80,000 Exercise 2-14 Fightin’ Blue Hens Incorporated Trial Balance March 31 Accounts Debit Credit Cash $ 2,500 Accounts receivable 3,200 Supplies 1,200 Prepaid insurance 1,300 Buildings 45,000 Accounts payable $ 1,700 Salaries payable 400 Common stock 25,000 Retained earnings 15,700 Service revenue 18,500 Salaries expense 5,400 Utilities expense 2,700 Totals $ 61,300 $ 61,300 Exercise 2-15 Requirement (1) Cash Debit Credit 32,000 Common Stock (Issue common stock) 32,000 (2) Land 19,000 Notes Payable (Purchase land with note payable) 19,000 (3) Equipment Cash (Purchase storage containers) 8,000 8,000 (4) No entry (5) Cash 12,000 Service Revenue (Receive cash for current month’s rent) 12,000 (6) Supplies Accounts Payable (Purchase office supplies on account) 2,000 2,000 (7) Salaries Expense Cash (Pay salaries for the current month) 6,000 6,000 Exercise 2-15 (continued) Requirement (1) Cash 32,000 Common Stock 32,000 (1) 8,000 (3) (5) 12,000 6,000 30,000 (2) (3) (6) (7) Land 19,000 19,000 (7) 32,000 Notes Payable 19,000 (2) 19,000 Equipment 8,000 8,000 Service Revenue Supplies 2,000 2,000 Accounts Payable 2,000 (6) 2,000 Salaries Expense 6,000 6,000 12,000 (5) 12,000 Exercise 2-15 (concluded) Requirement Green Wave Company Trial Balance Accounts Cash Supplies Land Equipment Accounts Payable Notes Payable Common Stock Service Revenue Salaries Expense Totals Debit $30,000 2,000 19,000 8,000 Credit $ 2,000 19,000 32,000 12,000 6,000 $65,000 $ 65,000 Exercise 2-16 Requirement (1) Debit Accounts Receivable Service Revenue (Provide painting on account) (2) 15,000 Equipment Cash (Purchase painting equipment) (3) 16,000 15,000 16,000 Supplies Accounts Payable (Purchase office supplies on account) (4) 2,500 Salaries Expense Cash (Pay salaries for the current month) (5) 3,200 2,500 3,200 Advertising Expense 1,200 Cash (Pay advertising for the current month) (6) Rent Expense Cash (Pay rent for the current month) (7) Cash Credit 1,200 4,400 4,400 10,000 Accounts Receivable (Receive cash on account) 10,000 (8) Cash 5,000 Unearned Revenue (Receive cash in advance for painting) 5,000 Exercise 2-16 (continued) Requirement Accounts Receivable Beg 1,200 (1) 15,000 10,000 (7) 6,200 Beg (2) Equipment 6,400 16,000 Beg (7) (8) 22,400 Beg (3) Beg (4) Beg (6) Supplies 400 2,500 2,900 Salaries Expense 3,200 3,200 15,000 Cash 21,100 16,000 3,200 1,200 4,400 10,000 5,000 11,300 (2) (4) (5) (6) Accounts Payable 1,100 Beg 2,500 (3) 3,600 Advertising Expense Beg (5) 1,200 1,200 Rent Expense 4,400 4,400 Common Stock 20,000 Beg 20,000 Service Revenue Beg 15,000 (1) Unearned Revenue Beg 5,000 (8) 5,000 Retained Earnings 8,000 Beg 8,000 Exercise 2-16 (concluded) Requirement Boilermaker House Painting Company Trial Balance Accounts Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Revenue Common Stock Retained Earnings Service Revenue Salaries Expense Advertising Expense Rent Expense Totals Debit $11,300 6,200 2,900 22,400 Credit $ 3,600 5,000 20,000 8,000 15,000 3,200 1,200 4,400 $51,600 $ 51,600 PROBLEMS: SET A Problem 2-1A = Liabilities + Stockholders’ Equity Issue common stock in exchange for cash Increase = No effect + Increase Purchase business supplies on account Increase = Increase + No effect Pay for legal services for the current month Decrease = No effect + Decrease Provide services to customers on account Increase = No effect + Increase Pay employee salaries for the current month Decrease = No effect + Decrease Provide services to customers for cash Increase = No effect + Increase Pay for advertising for the current month Decrease = No effect + Decrease Repay loan from the bank Decrease = Decrease + No effect Pay dividends to stockholders Decrease = No effect + Decrease 10 Receive cash from customers in (4) above No effect* = No effect + No effect 11 Pay for supplies purchased in (2) above Decrease = Decrease + No effect Transaction Assets *One asset (cash) increases and another asset (accounts receivable) decreases Problem 2-2A Transaction Provide services to customers on account, $1,600 Pay $400 for current month’s rent Hire a new employee, who will be paid $500 at the end of each month Pay $100 for advertising on a radio station that will be aired in the current period Purchase office supplies for cash Receive cash of $1,000 from customers in (1) above Obtain a loan from the bank for $7,000 Receive a bill of $200 for utility costs of the current period Issue common stock for $10,000 cash 10 Pay $500 to employee in (3) above Totals Assets = Liabilities Stockholders’ + Equity +$1,600 = + −$400 $0 −$100 = = = $0 $0 $0 $0 + + + +$1,600 −$400 $0 −$100 +$400 = $0 + $0 −$1,000 = $0 + $0 +$7,000 = +$7,000 + $0 $0 = +$200 + −$200 −$400 +$1,000 +$10,000 = $0 + +$10,000 −$500 = $0 + −$500 $17,600 = $7,200 + $10,400 Problem 2-3A Type of Account Normal Balance (Debit or Credit) Salaries Payable Liability Credit Common Stock Stockholders’ equity Credit Prepaid Rent Asset Debit Buildings Asset Debit Expense Debit Asset Debit Rent Expense Expense Debit Notes Payable Liability Credit Salaries Expense Expense Debit 10 Insurance Expense Expense Debit Asset Debit Revenue Credit Accounts Utilities Expense Equipment 11 Cash 12 Service Revenue Problem 2-4A Corrections External Transaction Owners invest $10,000 in the company and receive common stock Accounts Cash Common Stock Receive cash of $3,000 for services provided in the current period Cash Service Revenue Purchase office supplies on account, $200 Supplies Accounts Payable 200 Pay $500 for next month’s rent Prepaid Rent Cash 500 Purchase office equipment with cash of $1,700 Equipment Cash Debit Credit 10,000 10,000 3,000 3,000 200 500 1,700 1,700 ... account The left side is referred to as a debit and the right side is referred to as a credit Question 2-17 Posting is the process of transferring the debit and credit information from the journal... external transactions (d) Analyze the impact of the transaction on the accounting equation (b) Assess whether the impact of the transaction results in a debit or credit to the account balance (f) Record... Purchase land for $19,000 A note payable is signed for the full amount Assets increase Liabilities increase Purchase storage containers for $8,000 One asset (containers) increases and another asset