Chapter 3

Case 1.
Jessica decides to operates “Monster Cookies” as a corporation. She then starts the process
of getting the business running. In November 2019, the following activities take place.

Nov 8 Jessica sell her investments for $ 520, which she deposits in her personal bank
account.
Nov 8 She opens a bank account under the name “Monster Cookies” and transfer $500
from her personal account to the new account in exchange for ordinary shares.
Nov 11 Jessica pays $65 to have advertising brochures and posters printed. She plans to
distribute these as opportunities arise.
Nov 13 She buys baking supplies, such as flour, sugar, and butter for $125 cash.
Nov 14 Jessica starts to gather some baking equipment to take with her when teaching
the cookies class. She has an excellent top-of-the-line food processor and mixer
that originally cost her $750. Jessica decides to start using it only in her new
business. She estimates that the equipment is currently worth $300. She invests
the equipment in the business in exchange for ordinary shares.
Nov 16 Jessica realizes that her initial cash investment is not enough. Her grandmother
lends her $2,000 cash, for which Jessica signs a note payable for 2 years in the
name of the business. Jessica deposits the money in the business bank account.
Nov 17 She buys more baking equipment for $900 cash
Nov 20 She teaches her first class and collects $125 cash
Nov 25 Jessica books a second class for December 4 for $150. She receives $30 cash in
advance as down payment.
Nov 30 Jessica pays $1,320 for one-year insurance policy that will expire on December 1,
2020

Instructions
a. Prepare journal entries to record the November transactions.
b. Post the journal entries to general ledger accounts.
c. Prepare the trial balance at November 30.

Case 2.
It is the end of November and Jessica has been in touch with her grandmother. Her
grandmother asked Jessica how well things went in her first month of business. Jessica, too,
would like to know if the company has been profitable or not during November. Jessica
realizes that in order to determine Monster Cookies’s income, she must first make
adjustments to the accounts.

Jessica puts together the following additional information.

1. A count reveals that $35 of baking supplies were used during November.
2. Jessica estimates that the depreciation for her baking equipment is $20
3. Jessica’s grandmother has decided to charge annual interest 6% on the note payable
extended on November 16. The loan plus interest is to be repaid in 24 months.
(Assume that half a month of interest accrued during November).
 4. On November 30, Jessica teaches a group of first-grades students how to make
holiday cookies. Jessica prepares an invoice for $300 and leave it with school
principal. The principal says that he will pass the invoice along to the head offices,
and it will be paid in December.
5. Jessica receives a utilities bill for $45. The bill is for utilities consumed by Jessica’s
business during November and is due December 15.

Instructions : At November 30
a. Prepare and post the adjusting journal entries
b. Prepare an adjusted trial balance
c. Using the adjusted trial balance, calculate Monster Cookies’s net income or net loss
for the month of November by making income statement.
d. Prepare statement of retained earning and statement of financial position
e. Prepare closings entries.
f. Prepare Post-Closing Trial Balance.

Case 3
On January 1, 2015, Norma Smith and Grant Wood formed a computer sales and service
enterprise in Manchester, U.K., by investing £90,000 cash. The new company, Lakeland Sales
and Service, has the following transactions during January.
1. Pays £6,000 in advance for 3 months’ rent of office, showroom, and repair space.
2. Purchases 40 personal computers at a cost of £1,500 each, 6 graphics computers at a
cost of £2,500 each, and 25 printers at a cost of £300 each, paying cash upon
delivery.
3. Sales, repair, and office employees earn £12,600 in salaries and wages during
January, of which £3,000 was still payable at the end of January.
4. Sells 30 personal computers at £2,550 each, 4 graphics computers for £3,600 each,
and 15 printers for £500 each; £75,000 is received in cash in January, and £23,400 is
sold on a deferred payment basis.
5. Other operating expenses of £8,400 are incurred and paid for during January; £2,000
of incurred expenses are payable at January 31.

Instructions
a. Using the transaction data above, prepare for the month of January (1) a cash-basis
income statement, and (2) an accrual-basis income statement.
b. Using the transaction data above, prepare as of January 31, 2015, (1) a cash-basis
statement of financial position and (2) an accrual-basis statement of financial
position.
c. Identify the items in the cash-basis financial statements that make cash-basis
accounting inconsistent with the theory underlying the elements of financial
statements.