CHAPTER

The Bookkeeping Process and Transaction Analysis

4
E4.1.

ASSETS
Accounts

= LIABILITIES + OWNERS' EQUITY

Merchandise

Notes

Accounts

Cash + Receivable + Inventory + Equipment = Payable + Payable

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

Paid in

Retained

+ Capital + Earnings + Rev - Exp

+8,000

+8,000

+5,000

+5,000

-1,750

+1,750

-1,400

-1,400

-9,000

+15,000

+6,500

-4,000

+6,000
+6,500 -4,000
+100

-1,200
+3,900

+4,200
+9,600

-100

+3,000

-9,000

+13,500

-9,000

+1,850*
+3,160

-3,160

-4,720
______

-1,850

-4,720
_____

8,490 + 6,440

_____
+

6,200

+

_____

_____

_____

1,750 =

5,000 +

6,230

_____
+

8,000 +

_____

______

_____

+ 20,000 - 16,350

Month-end totals: Assets $22,880 = Liabilities $11,230 + Owners' equity $11,650
Net income for the month: Revenues $20,000 - Expenses $16,350 = Net income $3,650
* Ordinarily, the Wages Payable account would be increased for employee wage expense
that has been incurred but not yet paid.
Optional Continuation:
BLUE CO. STORES, INC.
Income Statement
Sales………………………………………………………………..
Cost of goods sold………………………………………………….
Gross profit…………………………………………………………
Rent expense……………………………………………………….
Wages expense……………………………………………………..
Advertising expense………………………………………………..
Net income (this exercise ignores income taxes)…………………..

© The McGraw-Hill Companies, Inc., 2009

4-1

$20,000
(13,000)
$ 7,000
(1,400)
(1,850)
(100)
$ 3,650

.............. Dr...............130 1.. 1.................. Thus..000 b......Chapter 4 The Bookkeeping Process and Transaction Analysis E4...... the net income for the month creates a positive balance in retained earnings. $ 8.................. Total owners’ equity………………………………………………. Cr................000 c...............000 .. Cr....................400 9.........................000 1..880 Liabilities: Notes payable……………………………………………………… Accounts payable………………………………………………….........3................. Cash.750 1...................750 d.750 $22........... 15.. Accounts Payable............... Balance Sheet Assets: Cash………………………………………………………………............ 2009 4-2 8.............................. a................................................................................. Total current assets………………………………………………… Equipment (this exercise ignores depreciation)…………………… Total assets………………………………………………………… $ 8....... Accounts receivable………………………………………………....... Cr......... Rent Expense..000 6. the Retained Earnings account would have a $0 beginning balance.........650 $22.200 $21... Retained earnings *………………………………………………... Cr..... $ 5................ Dr..1.. 1.. Equipment.... Paid-In Capital. E4..490 6.................................... Merchandise Inventory...000 6............ Cash. 5...... Total liabilities…………………………………………………….......................................... Cr.... Dr................................440 6............... Cr....................230 Owners’ Equity: Paid-in Capital…………………………………………………….880 * Since this was the first month of operations........... Total liabilities and owners’ equity……………………………….....................................000 5..... Cash.............................. Note Payable.... STORES................... Inc.......................230 $11................................................................ Merchandise inventory……………………………………………............................650 $11... Dr................. Cash......... 8.......400 e.000 © The McGraw-Hill Companies................. Cash . .....000 3...................... Dr............... (continued) BLUE CO. INC.........

. Cr...……… 4............. Merchandise Inventory......................... Accounts Payable.......... 6................ Cr....200 3........000 1............................................ (continued) f................................ 3.......................000 4.. Inc....................... Dr.000 100 1... Dr...................500 9..... © The McGraw-Hill Companies................. Sales Revenue.... Cost of Goods Sold....850 k...........000 9................. Cash... Cr....... Cash...... Wages Expense............. 4............ 100 h.............. Cr........... Cr........................... 3............. Accounts Receivable..............................................................................600 j..Solutions to Odd-Numbered Problems E4........................200 i.............. 2009 4-3 6........................... Dr............................ Merchandise Inventory..160 4..... Cr........................ Dr................................... Accounts Receivable.............................................. Dr.............5.........500 4....... Merchandise Inventory...... Accounts Payable.........................................................900 9...500 g..........720 .......................................……… Cr........................... Cash .......... Dr................................................850 3......................................... Advertising Expense........................ Cost of Goods Sold ........... Cash................... Cr.........................................3................ Sales Revenue..........000 13...........................................720 E4.............................................. Dr............... Cash..... .................... Dr.................. Accounts Payable.......................................................................................... Cr......... 1........... Cr...................................... Accounts (or Wages) Payable ............... Dr...... Dr.....................160 l....................

...... Commissions Payable +700 Commissions Expense -700 f. Accrued $700 of commissions payable to sales staff for the current month..............................5... Supplies Expense ...... Accounts Rec -2...……… Cash -3.. Inc............... A = a....... Accrued $800 of wages at the end of the current month........200 of wages for the current month......... Inventory +600 i....................... Paid $160 of interest expense for the month. Accrued $130 of interest expense at the end of the month................... Received $250 of interest income for the current month..400 .............. Purchased $600 of merchandise Merch inventory from a supplier on account…..................100 accrued at the end of the prior month….........Chapter 4 The Bookkeeping Process and Transaction Analysis Transaction/Situation E4......... Accounts Payable +600 Cash -160 j....... Received $2....... Dr... k.. prepaid insurance.......200 L + OE Net Income Supplies Exp -1.400 Wages Exp -3............. Supplies -1..... Supplies .. = L + OE Cash +250 Net Income Interest Inc +250 e.... Cr. An asset.....100 on accounts receivable Cash +2......400 1.. Interest Pay +130 Interest Exp -130 g. 2009 4-4 1.....…………....... Paid an insurance premium of $480 for the coming year.……… © The McGraw-Hill Companies.. Example transaction......200 (continued) Transaction/Situation A d............ was debited………………… Prepaid Insurance +480 Cash -480 c.... Paid $3..100 h.400 b............................. Paid $500 of accounts payable………… Interest Exp -160 Wages Pay +800 Cash Wages Exp -800 Accounts Pay -500 -500 Journal entries: a..........

.....Solutions to Odd-Numbered Problems b.....200 250 Cr........ Dr......................... 160 800 Cr................................................... 2........................ f....................... e......................................................... Cash........100 Cr.........................................200 Cr..... i............................... Inc....100 600 Cr..................................................... 250 700 Cr.......... Commissions Expense.......................... 700 130 Cr............................... Accounts Receivable.................. Cash................ Dr................... Interest Income.............................................. k......................... Dr..................................... 480 3...................... Interest Expense.............. Cr.................................................. 600 160 Cr........... Dr...... Dr...... Cash................................ © The McGraw-Hill Companies............ 3.......................................... Accounts Payable.......... Interest Payable.................... Dr...................................... Wages Expense........... Commissions Payable............................................................................... Interest Expense........................................... E4........ Wages Payable ............................. Dr............................……… c........ Dr........ d...................... Dr............ Cash ..……… 480 Cr................ Accounts Payable .................................. Wages Expense............................................................ Dr.. j.........................................................................7.............................. Cash...................................................5.................. h................................... Merchandise Inventory.... 130 (continued) g. Prepaid Insurance.... 2009 4-5 800 500 500 .................................. E4...... 2.............. Cash.............................................

............................. Cash ........... Insurance Expense.... Wages Expense...... Prepaid Insurance...................................................... b.. Dr.......500 .... Paid an insurance premium of $360 for the coming year........... 2..................................Chapter 4 The Bookkeeping Process and Transaction Analysis Transaction/Situation A a........600 f....... Inc.......................................500 receivable accrued in prior month.............................. Cash ........................ Prepaid Insurance................... Cash....... -1.500 Journal entries: a................ Accounts Receivable........ Cr. Dr................................... Wages Expense.. Cash.............. Service Revenue .......... -30 d...............600 +600 -600 g.... Cr..... Cr... -2............. Dr... 2009 4-6 30 800 2................ Dr...... 360 (continued) c......................... Accrued $600 of wages at the end of the current month......................……… 1.. Received cash of $1....500 E4...... Paid $2.....……… 550 360 Cr.......................................... Paid $800 of wages accrued at the end of the prior month.................7............................ Dr......................... 800 e.......................... 550 Cr.500 on accounts +1.... Cr..............……….....600 600 1..................... -360 +360 c........ Example transaction....................600 f................................................................ Wages Payable........... Dr................. "prepaid insurance" was debited…............. Cr.......................... = L + OE Net Income +550 -30 -800 -2.............. 600 g................ -800 e... Accounts Receivable..................... Dr.................................... Wages Payable .................. © The McGraw-Hill Companies..........................................................................................600 of wages for the current month.................................................9........................... +550 b. An asset...... 30 d...................... Recognized insurance for one month from the above premium via a reclassification adjusting entry…................................................. E4......

............... Note Receivable . 2009..... 2008: Interest Receivable +675 c...................... Collection of note and interest at March 31.............Solutions to Odd-Numbered Problems Prepare an analysis of the change in stockholders' equity for the month.... Accounts Receivable.. $ 630...................000 ............... showing the effects of the net loss and dividends: Balance...........................................000 b..000 Account Receivable -6....................000) $ 610.......................... Revenues............ Interest Revenue +675 Interest Revenue +225 (continued) Journal entries: a.......................... Assets = Liabilities + Owners’ Equity  Net income = Revenues ..000 Interest Receivable -675 E4........... Accrual of 9 month's interest at December 31...000 (131.......900 Note Receivable -6....……… Cr... Dividends.Expenses a............ 2008: Notes Receivable +6............. Inc........... 2009: Cash +6.............................. 2009..................... February 28..........000 $123.....000 6.... Balance............000) (8..... Expenses...............000 E4.............……… © The McGraw-Hill Companies.............. Balance Sheet Income Statement ..... February 1......... 4/1/2008 Dr..11...000) (12......... Receipt of note on April 1........ 2009 4-7 6..............11................

.... E4...... There wouldn't be any effect on net income for the two months combined.900 6.........$1... Thus... $1..... Cr........ The Interest Expense account would most likely have been debited for the February adjustment...13................... so the Interest Receivable account is reduced by the $675 that had been accrued in 2008.......... Cr........ and would represent the accrual of interest expense for February....... Interest Revenue ($6.... the February 28 adjustment = $2... Balance Sheet Income Statement ................... Note Receivable.. the year in which it was earned.... Net income for November would be understated... Cash.......... because the overstatement and understatement offset.. E4... Inc........ Interest Receivable............. Net income for October would be overstated.................... Cr..................... only $675 of the total interest of $900 had been accrued............... To match revenues and expenses.. which results in more accurate financial statements..……… Cr.......000 675 225 In entry c..... c.. P4..500 = $2...............Expenses © The McGraw-Hill Companies.100.. because an expense was not recorded...................... d. c.. a.....17. Assets = Liabilities + Owners’ Equity  Net income = Revenues . and would represent the payment of previously accrued interest........... 675 675 6..000 * 15% * 9/12)....200 + ? ............... The adjustment resulted in a better matching of revenue and expense for February........... The entry would have been made to make the income statement and balance sheet more accurate......Chapter 4 The Bookkeeping Process and Transaction Analysis b......... c... 3/31/2009 Dr. 12/31/2008 Dr. the other $225 that is received is recorded as interest revenue for 2009.... because November expenses would include an expense from October............ b........ 2009 4-8 .......... The Cash account would most likely have been credited for the amount of the February transactions... Interest Receivable.... a. d................15.. Interest Revenue.400 b....................

Solutions to Odd-Numbered Problems a. Inc. 2009 4-9 . Merchandise Accounts Inventory Payable +640.000 Common Stock +1.000 Sales +910. Cash -36.000 Payable Cash +100.000 Interest Exp -60. Cash +1.000 i.000 -50.000 Merchandise Inv -580.000 j.000 g.000 f.000.000 b. (continued) © The McGraw-Hill Companies.000 l.000 k.000. Cash +825. Rent Payable +10.000 Rent Exp -110.17.. Cash -720. Interest Pay +60.000 Accounts Payable -720.000 Cost of Goods Sold -580. Cash -110. Accounts Rec +910. Cash +500.000 h.000 Rent Exp -10.000 e.000 Utilities Exp -36.000 Accounts Rec -825.000 Notes Payable +500.000 +640.000 P4.000 d. Cash -380.000 c. Equipment Accounts +150.00 Salaries Exp -380.

................................................... Accounts Payable..................... Dr...... 720....... Dr..000 60.............................................. Cr.......000 825...........Chapter 4 The Bookkeeping Process and Transaction Analysis Journal entries: a. Cost of Goods Sold........................................ 110............ Rent Payable (or Accounts Payable).................... Cr.... Cr...............……… 825.... Common Stock.................000 580........................... Equipment.. Merchandise Inventory.................................. Utilities Expense............... Sales.................................................................... Cash........000 ........................................……… 10..............000 640.000 g.................................. Cr........................................ Accounts Receivable.............. Dr.............................. 2009 4-10 500................... Cash............................... Salaries Expense.................. 380......……… Cr.............................. Cr...........................000 36............................................... Interest Payable.. Cr................000 380. Dr....................................000 h............................ Cash...................................................000 P4....... Accounts Payable...................000 k..............000 d.........................000 l.000 910................... 640..................................................................................000 e......... Cash.............................................................. Dr.................... 60...............................................000............................................................ Dr.................. 150.............. Cash.. 500... Notes Payable........ Cash.........000 720......................19.......................... Cr.................................000 f. Rent Expense.................. Dr..000 Cr.....000.........................000 i...... Dr.................................... 36........................................................................... Cr................ © The McGraw-Hill Companies.............. Accounts Payable...... 1............ Rent Expense..... Merchandise Inventory.....000 580..... Accounts Receivable................ 1..........000 100......................000 b...... ............................. Cr................. ..............................................000 50......... Cr....................... Dr. Dr.......... Inc.......000 c................................. 910.........................................000 110........................................ Cash.. Cash..000 10.................. Cr. Dr............ Dr........ Interest Expense. Cr.............................000 j................... Dr..............

.................................................000) Net income..............................000 P4..........……… $741......……… Other selling expenses................... Income from operations (operating income).................................................... Income from operations (operating income).......................................... 2009 4-11 Supplies Expense -950 ....……… $211....000 (329.) -4....……… General and administrative expenses ..........……… (61.......................……… (83.......000.......... Gross profit...........850 c.......……… $128.......... net of tax savings of $25...................000) Income before extraordinary items...... Set up as an asset the cost of paper napkins purchased for cash.. 1/31/09...Expenses a...850 (Note: A decrease in Supplies Expense Expense increases Net Income.....Solutions to Odd-Numbered Problems a..21......……… Advertising expense.................. Record as an expense the cost of paper napkins purchased for cash: Cash Supplies -4... Supplies Supplies +3...........................000 Extraordinary loss from earthquake.... 1/31/09...............................000 Income tax expense.................000 (83............................... .............800 d....... Supplies +4................. Cost of goods sold...................) +3.............800 (Note: An increase in Supplies Expense Expense decreases Net Income.....000) $211..... Record the cost of paper napkins used in January............................ Inc.....000) (76.................. Supplies -950 P4........ $ 67....... Assets = Liabilities + Owners’ Equity  Net income = Revenues .............. 1/10/09...................... Net sales .... 1/10/09......000) $412................................800 Cash -4....21...................... Remove from the expense account and set up as an asset the cost of the paper napkins on hand January 31...................... (continued) © The McGraw-Hill Companies......000) (42................................................800 b............. Balance Sheet Income Statement .................000 b.........

..850 3.......... P4......... d.........800 4..........800 4..... .. Each approach results in the same expense for January ($950) and the same asset amount ($3....... To record the cost of paper napkins used in January.................. Cash . 2009 4-12 950 ... Paper Napkins on Hand (or Supplies)....Chapter 4 The Bookkeeping Process and Transaction Analysis Journal entries: a...... Inc................ Paper Napkins on Hand (or Supplies).......850 4........ 1/10/09 Dr......... Paper Napkins on Hand................................……… Cr........... 1/31/09 Dr. 1/10/09 Dr....... ............. 4. To set up as an asset the cost of paper napkins purchased for cash. Paper Napkin Expense (or Supplies Expense).............. Paper Napkin Expense (or Supplies Expense). Cash.................... Cr... Paper Napkin Expense (or Supplies Expense).……… To record as an expense the cost of paper napkins purchased for cash.……… Cr..... Cr............... 1/31/09 Dr...... c............. © The McGraw-Hill Companies...850) reported on the January 31 balance sheet........800 3..23..................800 950 e. b...........(or Supplies).......... To remove from the expense account and set up as an asset the cost of paper napkins on hand January 31...................

.314 -24..914 +35.. © The McGraw-Hill Companies..... Collections of accounts receivable. c............ and accounts payable........382 -17....587 -24.....126 +35......... Payment of accounts payable .587 Net Revenues Expenses -6... Ending balance......352 +18.. To answer the questions in part b.. General and Administrative Expenses 2.....249 -17.352 $ 4... To answer the questions in part c.... Assets Liabilities Revenues Cash and Accounts Cash Receivable....... ………........096 .......... Accounts Equivalents net Inventories Payable a. Beginning balance..164 +36.. Cost of sales........164 +6....341 $ 2.....096 +18. Marketing...709 4-13 Cost of Sales . Marketing.... 2009 3.............382 3. Inc. students should be thinking about how Intel would record each of the transactions.. b......341 $ 2....... general and administrative expenses Purchases of inventory on account.. students should be solving for the missing amounts in T-accounts for inventories....………… Net revenues.... accounts receivable.Solutions to Odd-Numbered Problems Note: The key to this problem is for students to see that transactions have a direct effect on the financial statements......356 -36...