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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.

68 Financial Accounting Canadian Edition Instructor’s Solutions Manual


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

Chapter 2 Processing Accounting Information 69


(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)

70 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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.

Chapter 2 Processing Accounting Information 71


(10-15 min.) CP 2-6
Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

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.

72 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(10-15 min.) CP 2-7
Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

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


Service Revenue .......................... 800
Performed service on account.

Cash.................................................... 500
Accounts 500
Receivable……………..
Received cash on account.

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

Chapter 2 Processing Accounting Information 73


(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)

74 Financial Accounting Canadian Edition Instructor’s Solutions Manual


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)

Chapter 2 Processing Accounting Information 75


(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

76 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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)

Chapter 2 Processing Accounting Information 77


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

78 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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.

Chapter 2 Processing Accounting Information 79


(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

80 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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.)

Chapter 2 Processing Accounting Information 81


(10-15 min.) E 2-5

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

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
Purchased supplies on account.

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.

82 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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)

Chapter 2 Processing Accounting Information 83


(10-20 min.) E 2-7
Req. 1 (journal entries)

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

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
Paid cash on account.

17 Accounts Receivable ................................. 1,200


Service Revenue..................................... 1,200
Performed service on account.

23 Cash ............................................................. 1,200


Accounts Receivable ............................. 1,200
Received cash on account.

30 Salary Expense ........................................... 1,000


Rent Expense.............................................. 500
Cash......................................................... 1,500
Paid cash expenses.
84 Financial Accounting Canadian Edition Instructor’s Solutions Manual
(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)

Chapter 2 Processing Accounting Information 85


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

Cash Accounts Receivable


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

Accounts Payable Common Shares


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

86 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(continued) E 2-8
Req. 2

Computex Learning Systems Inc.


Trial Balance
August 31, 2005
ACCOUNT DEBIT CREDIT
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

Chapter 2 Processing Accounting Information 87


(10-15 min.) E 2-9

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

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
Purchased supplies on account.

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
Paid cash on account.

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


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

88 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(10-20 min.) E 2-10
Req. 1

Mirvish Appliance Service Ltd.


Trial Balance
May 31, 2004
ACCOUNT DEBIT CREDIT
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).

Chapter 2 Processing Accounting Information 89


(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

90 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(15-25 min.) E 2-11
Brandon Auto Paint Ltd.
Trial Balance
February 28, 2005
ACCOUNT DEBIT CREDIT
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

Chapter 2 Processing Accounting Information 91


(5-15 min.) E 2-12
Cash Accounts Receivable
(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

Accounts Payable Common Shares


(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

92 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(10-20 min.) E 2-13
Req. 1

Linda English Insurance Ltd.


Trial Balance
July 31, 2006
ACCOUNT DEBIT CREDIT
Cash........................................ $ 2,300
Accounts receivable ............. 1,700
Office supplies....................... 800
Office furniture ...................... 12,400
Accounts payable ................. $ 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)

Chapter 2 Processing Accounting Information 93


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

Cash Accounts Receivable


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

94 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(continued) E 2-14
Req. 2

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

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

Chapter 2 Processing Accounting Information 95


(continued) E 2-14
Req. 4

Tsui Tax Consulting Ltd.


Trial Balance
December 18, 2004
ACCOUNT DEBIT CREDIT
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

96 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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

Chapter 2 Processing Accounting Information 97


(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

98 Financial Accounting Canadian Edition Instructor’s Solutions Manual


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

Road Runner Inc.


Trial Balance
December 31, 2005

Cash........................................ $ 4,200
Accounts receivable ............. 2,200
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.

Chapter 2 Processing Accounting Information 99


(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.

100 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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.

Chapter 2 Processing Accounting Information 101


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.


102 Financial Accounting Canadian Edition Instructor’s Solutions Manual
(45-60 min.) P 2-2A
Req. 1

Haas Interiors Inc.

Analysis of Transactions
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
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

Chapter 2 Processing Accounting Information 103


(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

104 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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

Chapter 2 Processing Accounting Information 105


(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

106 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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.

Chapter 2 Processing Accounting Information 107


(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

108 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(continued) P 2-4A
Req. 2
Gerbing and Associates Inc.

Analysis of Transactions
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
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.
Chapter 2 Processing Accounting Information 109
(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).

110 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(continued) P 2-4A
Req. 4

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
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
Performed service on account.

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.

Chapter 2 Processing Accounting Information 111


(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

112 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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)

Chapter 2 Processing Accounting Information 113


(50-60 min.) P 2-6A
Req. 1 (journal entries; explanations not required)

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

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

114 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(continued) P 2-6A
Req. 1 (journal entries; explanations not required)

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

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

Chapter 2 Processing Accounting Information 115


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

Cash Accounts Receivable


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

Accounts Payable Common Shares


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
116 Financial Accounting Canadian Edition Instructor’s Solutions Manual
(continued) P 2-6A
Req. 3

O’Dell Financial Planners Ltd.


Trial Balance
January 31, 2004
ACCOUNT DEBIT CREDIT
Cash........................................ $ 8,360
Accounts receivable ............. 400
Supplies.................................. 500
Furniture................................. 2,600
Land ........................................ 22,000
Accounts payable ................. $ 500
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)

Chapter 2 Processing Accounting Information 117


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

Cash Accounts Receivable


(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

118 Financial Accounting Canadian Edition Instructor’s Solutions Manual


(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

Chapter 2 Processing Accounting Information 119


(continued) P 2-7A
Req. 3

Red River CableVision Inc.


Trial Balance
January 31, 2005
ACCOUNT DEBIT CREDIT
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)
120 Financial Accounting Canadian Edition Instructor’s Solutions Manual
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.


Chapter 2 Processing Accounting Information 121
(45-60 min.) P 2-2B
Req. 1

Bow River Designers Inc.

Analysis of Transactions
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
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

122 Financial Accounting Canadian Edition Instructor’s Solutions Manual