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Chapter 2

Analyzing and Recording Transactions


QUICK STUDIES
Quick Study 2-1 (5 minutes)
The likely source documents include:
b. Telephone bill
c. Sales ticket
f. Invoice from supplier
h. Bank statement

Quick Study 2-2 (10 minutes)


a.
b.
c.
d.
e.
f.
g.
h.
i.

I
E
B
B
B
I
B
B
B

Income statement
Statement of owners equity
Balance sheet
Balance sheet
Balance sheet
Income statement
Balance sheet
Balance sheet
Balance sheet

Quick Study 2-3 (10 minutes)


a.
b.
c.

Debit
Debit
Credit

d.
e.
f.

Debit
Debit
Debit

g.
h.
i.

Credit
Debit
Credit

Quick Study 2-4 (10 minutes)


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55

a.
b.
c.
d.

Debit
Debit
Credit
Credit

e.
f.
g.
h.

Debit
Credit
Credit
Debit

i.
j.
k.
l.

Credit
Debit
Debit
Credit

Debit
Credit
Credit
Credit

i.
j.

Credit
Debit

Quick Study 2-5 (10 minutes)


a.
b.
c.
d.

Debit
Credit
Debit
Credit

e.
f.
g.
h.

Quick Study 2-6 (15 minutes)


Jan.13 Cash .......................................................................... 80,000
Equipment ............................................................... 30,000
D. Tyler, Capital...............................................
110,000
Owner invests cash and equipment.

21 Office Supplies ........................................................


Accounts Payable ...........................................

820
820

Purchased office supplies on credit.

29 Cash ..........................................................................
Landscaping Services Revenue....................

8,700
8,700

Received cash for landscaping services.

30 Cash ..........................................................................
Unearned Landscaping Services Revenue ..

4,000
4,000

Received cash in advance for landscaping services.

Quick Study 2-7 (10 minutes)


The correct answer is c.
Explanation: If a $2,250 debit to Rent Expense is incorrectly posted as a
credit, the effect is to understate the Rent Expense debit balance by $4,500.
This causes the Debit column total on the trial balance to be $4,500 less
than the Credit column total.

Quick Study 2-8 (10 minutes)


a.
b.

I
I

e.
f.

B
I

i.
j.

B
I

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Fundamental Accounting Principles, 19th Edition

c.
d.

I
B

g.
h.

B
B

k.
l.

E
B

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57

EXERCISES
Exercise 2-1 (15 minutes)

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

Account
Owner Capital.............................
Accounts Receivable.................
Owner Withdrawals....................
Cash ............................................
Equipment ..................................
Fees Earned................................
Wages Expense..........................
Unearned Revenue ....................
Accounts Payable ......................
Postage Expense .......................
Prepaid Insurance......................
Land ............................................

Type of
Account
equity
asset
equity
asset
asset
revenue
expense
liability
liability
expense
asset
asset

Increase

Normal
Balance
credit
debit
debit
debit
debit
credit
debit
credit
credit
debit
debit
debit

(Dr. or Cr.)

credit
debit
debit
debit
debit
credit
debit
credit
credit
debit
debit
debit

Exercise 2-2 (15 minutes)


a.

b.

c.

Beginning cash balance (debit).............................................


Cash received in October (debits) ........................................
Cash disbursed in October (credits).....................................
Ending cash balance (debit) ..................................................

?
104,750
(101,607)
$ 17,069

Beginning cash balance (debit).............................................

$ 13,926

Beginning accounts receivable (debit) .................................


Sales on account in October (debits) ...................................
Collections on account in October (credits) ........................
Ending accounts receivable (debit) ......................................

$ 83,250
?
(75,924)
$ 85,830

Sales on account in October (debits) ...................................

$ 78,504

Beginning accounts payable (credit) ....................................


Purchases on account in October (credits) .........................
Payments on accounts in October (debits)..........................
Ending accounts payable (credit) .........................................

$148,000
271,876
(
?)
$137,492

Payments on accounts in October (debits)..........................

$282,384

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Exercise 2-3 (15 minutes)


The company would make the following entry (not required for answer):
Cash .................................................................. 12,000
Computer Equipment ...................................... 90,000
Note Payable ..............................................
37,000
Services Revenue......................................
65,000
Accepted cash, equipment and note for services.

Thus, of the a through f items listed, the following effects should be included:

a. $37,000 increase in a liability account.


b. $12,000 increase in the Cash account.
e. $65,000 increase in a revenue account.
Explanation: This transaction reflects $65,000 in revenue, which is the
value of the service provided. Payment is received in the form of a $12,000
increase in cash, an $90,000 increase in computer equipment, and a
$37,000 increase in its liabilities. The net value received by the company is
$65,000.

Exercise 2-4 (25 minutes)


Aug. 1 Cash .................................................................. 14,250
Photography Equipment ................................. 61,275
M. Harris, Capital .......................................

75,525

Owner investment in business.

2 Prepaid Insurance............................................
Cash ............................................................

3,300
3,300

Acquired 24 months of insurance coverage.

5 Office Supplies.................................................
Cash ............................................................

2,707
2,707

Purchased office supplies.

20 Cash ..................................................................
Photography Fees Earned ........................

3,250
3,250

Collected photography fees.

31 Utilities Expense ..............................................


Cash ............................................................

871
871

Paid for August utilities.

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Exercise 2-5 (30 minutes)

Balance

Cash
14,250
Aug. 2
3,250
5
31
10,622

Aug. 5

Office Supplies
2,707

Aug. 2

Prepaid Insurance
3,300

Aug. 1
20

3,300
2,707
871

Photography Equipment
Aug. 1
61,275
M. Harris, Capital
Aug. 1

75,525

Photography Fees Earned


Aug. 20
3,250

Aug. 31

Utilities Expense
871

SPECIAL PICS
Trial Balance
August 31
Debit

Cash ...............................................................................

$10,622

Office supplies ..............................................................

2,707

Prepaid insurance .........................................................

3,300

Photography equipment...............................................

61,275

Credit

M. Harris, Capital...........................................................

$75,525

Photography fees earned .............................................

3,250

Utilities expense............................................................

871

_______

Totals..............................................................................

$78,775

$78,775

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Exercise 2-6 (30 minutes)

(a)
(d)
(h)
Balance

Cash
14,000
1,652
1,246

(b)
(e)
(g)
(i)

406
7,742
510
1,200

(e)

7,040

(f)
Balance

Accounts Receivable
2,968
(h)
1,722

(b)
Balance

Office Supplies
406
406

(c)
Balance

Office Equipment
7,742
7,742

1,246

(i)
Balance

Accounts Payable
7,742 (c)
Balance

7,742
0

S. Amena, Capital
(a)
Balance

14,000
14,000

S. Amena, Withdrawals
1,200
1,200
Fees Earned
(d)
(f)
Balance

(g)
Balance

1,652
2,968
4,620

Rent Expense
510
510

Exercise 2-7 (15 minutes)


AMENA COMPANY
Trial Balance
May 31, 2009
Cash.........................................................................................
Accounts receivable...............................................................
Office supplies........................................................................
Office equipment ....................................................................
Accounts payable ...................................................................
S. Amena, Capital ...................................................................
S. Amena, Withdrawals ..........................................................
Fees earned.............................................................................
Rent expense ..........................................................................
Totals .......................................................................................

Debit
$ 7,040
1,722
406
7,742

Credit

0
14,000

1,200
510
$18,620

4,620
______
$18,620

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Exercise 2-8 (20 minutes)


Transactions that created expenses:

b.

Salaries Expense.........................................
Cash .......................................................

1,233
1,233

Paid salary of receptionist.

d.

Utilities Expense .........................................


Cash .......................................................

870
870

Paid utilities for the office.

[Note: Expenses are outflows or using up of assets (or the creation of


liabilities) that occur in the process of providing goods or services to
customers.]

Transactions a, c, and e are not expenses for the following reasons:


a. This transaction decreased assets in settlement of a previously
existing liability, and equity did not change. Cash payment does not
mean the same as using up of assets (expense was recorded when the
supplies were used).
c. This transaction involves the purchase of an asset. The form of the
companys assets changed, but total assets did not change, and the
equity did not decrease.
e. This transaction is a distribution of cash to the owner. Even though
equity decreased, the decrease did not occur in the process of
providing goods or services to customers.

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Fundamental Accounting Principles, 19th Edition

Exercise 2-9 (15 minutes)


TECH TALK
Income Statement
For Month Ended October 31
Revenues
Consulting fees earned.........................
Expenses
Salaries expense ................................... $12,405
Rent expense .........................................
6,859
Telephone expense ...............................
560
Miscellaneous expenses ......................
280
Total expenses ......................................
Net income ..................................................

$25,620

20,104
$ 5,516

Exercise 2-10 (15 minutes)


TECH TALK
Statement of Owners Equity
For Month Ended October 31
D. Shabazz, Capital, October 1..................
Add: Investments by owner ....................
Net income (from Exercise 2-10) ......
Less: Withdrawals by owner ....................
D. Shabazz, Capital, October 31................

$
0
124,114
5,516
129,630
2,000
$127,630

Exercise 2-11 (15 minutes)

TECH TALK
Balance Sheet
October 31
Assets
Cash...............................$ 12,614
Accounts receivable .... 25,648
Office supplies..............
4,903
Office equipment .......... 27,147
Land............................... 69,388
Total assets...................$139,700
*

Liabilities
Accounts payable................ $ 12,070
Equity
D. Shabazz, Capital .............

127,630*
.

Total liabilities & equity ...... $139,700

Computation shown in Exercise 2-11.


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Exercise 2-12 (20 minutes)


Assets

a.

Beginning of the year .......... $131,000


End of the year ..................... 180,000
Net increase in equity ..........

Liabilities

$56,159
72,900

= Equity
= $74,841
= 107,100
$32,259
$

?
0
(0)
$32,259

Net Income............................
Plus owner investments ......
Less owner withdrawals......
Change in equity ..................
Therefore, income must equal $32,259.
b.

Net income .........................................................................


Plus owner investments ...................................................
Less owner withdrawals ($650/mo. x 12 mo.).................
Change in equity ...............................................................

?
0
(7,800)
$32,259

Therefore, net income must equal ($32,259 + $7,800) = $40,059


c.

Net income .........................................................................


Plus owner investments ...................................................
Less owner withdrawals ...................................................
Change in equity ...............................................................

?
45,000
(0)
$32,259

Therefore, the net loss must equal ($32,259 - $45,000) = $(12,741)


d.

Net income .........................................................................


Plus owner investments ...................................................
Less owner withdrawals ($650/mo. x 12 mo.).................
Change in equity ...............................................................

?
25,000
(7,800)
$32,259

Therefore, income must equal ($32,259+$7,800-$25,000)= $15,059

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Fundamental Accounting Principles, 19th Edition

Exercise 2-13 (15 minutes)


Answers

(a)

(b)

(c)

(d)

$(45,000)

$64,665

$71,347

$(47,000)

Computations:
Equity, Dec. 31, 2008..... $

Owner investments ....... 112,500

64,665

85,347

201,871

Owner withdrawals........

(45,000)

(51,000)

(8,000)

(53,000)

Net income (loss) ..........

27,000

78,000

(6,000)

(47,000)

Equity, Dec. 31, 2009..... $94,500

$91,665

$71,347

$101,871

Exercise 2-14 (25 minutes)


a. Belle created a new business and invested $12,000 cash, $15,200 of
equipment, and $24,000 in automobiles.
b. Paid $4,800 cash in advance for insurance coverage.
c. Paid $2,000 cash for office supplies.
d. Purchased $300 of office supplies and $9,700 of equipment on credit.
e. Received $9,000 cash for delivery services provided.
f.

Paid $4,600 cash towards accounts payable.

g. Paid $820 cash for gas and oil expenses.

Exercise 2-15 (30 minutes)


a.

b.

Cash ...........................................................................
Equipment .................................................................
Automobiles ..............................................................
D. Belle, Capital .................................................
Owner invested in business.

12,000
15,200
24,000

Prepaid Insurance.....................................................
Cash....................................................................
Purchased insurance coverage.

4,800

51,200

4,800
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c.

d.

e.

f.

g.

Office Supplies..........................................................
Cash....................................................................
Purchased supplies with cash.

2,000

Office Supplies..........................................................
Equipment .................................................................
Accounts Payable .............................................
Purchased supplies and equipment on credit.

300
9,700

Cash ...........................................................................
Delivery Services Revenue...............................
Received cash from customer.

9,000

Accounts Payable .....................................................


Cash....................................................................
Made payment on payables.

4,600

Gas and Oil Expense ................................................


Cash....................................................................
Paid for gas and oil.

820

2,000

10,000

9,000

4,600

820

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Fundamental Accounting Principles, 19th Edition

Exercise 2-16 (20 minutes)

Description

(1)
(2)
Difference
between Column
Debit and with the
Credit
Larger
Columns
Total

(3)

(4)

Identify
account(s)
incorrectly
stated

Amount that account(s)


is overstated or
understated

a. $1,870 debit to Rent


Expense is posted as
a $1,780 debit.

b. $3,560 credit to Cash


is posted twice as two
credits to Cash.

$90

credit

Rent Expense

Rent Expense is
understated by $90

$3,560

credit

Cash

Cash is understated by
$3,560

Owner,
Capital

Owner, Capital is
understated by $7,120

Owner,
Withdrawals

Owner, Withdrawals is
understated by $7,120

Prepaid
Insurance

Prepaid Insurance is
understated by $1,630

c. $7,120 debit to the


Withdrawals account
is debited to Owners
Capital.

$0

d. $1,630 debit to
Prepaid Insurance is
posted as a debit to
Insurance Expense.

$0

e. $31,150 debit to
Machinery is posted
as a debit to Accounts
Payable.

f.

$4,460 credit to
Services Revenue is
posted as a $446
credit.

g. $820 debit to Store


Supplies is not
posted.

$0

Insurance
Expense

Insurance Expense is
overstated by $1,630

Machinery
Accounts
Payable

Machinery is
understated by $31,150
Accounts Payable is
understated by $31,150

$4,014

debit

Services
Revenue

Services Revenue is
understated by $4,014

$820

credit

Store
Supplies

Store Supplies is
understated by $820

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PROBLEM SET A
Problem 2-1A (90 minutes)
Part 1
a.

Cash.............................................................101 195,000
Office Equipment........................................163
8,200
Drafting Equipment ....................................164 80,000
J. Lancet, Capital ................................301

283,200

Owner invested cash and equipment.

b.

Land.............................................................172
Cash.....................................................101
Note Payable .......................................250

52,000
8,900
43,100

Purchased land with cash and note payable.

c.

Building .......................................................170
Cash.....................................................101

55,000
55,000

Purchased building.

d.

Prepaid Insurance ......................................108


Cash.....................................................101

2,300
2,300

Purchased 18-month insurance policy.

e.

Cash.............................................................101
Engineering Fees Earned ..................402

6,600
6,600

Collected cash for completed work.

f.

Drafting Equipment ....................................164


Cash.....................................................101
Note Payable .......................................250

24,000
9,600
14,400

Purchased equipment with cash and note


payable.

g.

Accounts Receivable .................................106


Engineering Fees Earned ..................402

14,500
14,500

Completed services for client.

h.

Office Equipment........................................163
Accounts Payable...............................201

1,100
1,100

Purchased equipment on credit.

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Fundamental Accounting Principles, 19th Edition

Problem 2-1A (Part 1 Continued)

i.

Accounts Receivable .................................106


Engineering Fees Earned ..................402

23,000
23,000

Billed client for completed work.

j.

Equipment Rental Expense .......................602


Accounts Payable...............................201

1,410
1,410

Incurred equipment rental expense.

k.

Cash.............................................................101
Accounts Receivable .........................106

8,000
8,000

Collected cash on account.

l.

Wages Expense ..........................................601


Cash.....................................................101

2,500
2,500

Paid assistants wages.

m.

Accounts Payable ......................................201


Cash .................................................. 101

1,100

1,100

Paid amount due on account.

n.

Repairs Expense ........................................604


Cash .................................................. 101

970

970

Paid for repair of equipment.

o.

J. Lancet, Withdrawals...............................302
Cash.....................................................101

10,450
10,450

Owner withdrew cash.

p.

Wages Expense ..........................................601


Cash.....................................................101

2,000
2,000

Paid assistants wages.

q.

Advertising Expense..................................603
Cash.....................................................101

2,400
2,400

Paid for advertising expense.

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Problem 2-1A (Continued)


Part 2
Cash
Date PR
(a)
(b)
(c)
(d)
(e)
(f)
(k)
(l)
(m)
(n)
(o)
(p)
(q)

Debit
195,000

Credit
8,900
55,000
2,300

6,600
9,600
8,000
2,500
1,100
970
10,450
2,000
2,400

No. 101
Balance
195,000
186,100
131,100
128,800
135,400
125,800
133,800
131,300
130,200
129,230
118,780
116,780
114,380

Accounts Receivable
No. 106
Date PR Debit
Credit
Balance
(g)
14,500
14,500
(i)
23,000
37,500
(k)
8,000
29,500

Debit
2,300

Debit
8,200
1,100

Debit
80,000
24,000

Debit
55,000

Debit
52,000

Date PR
(b)
(f)

Debit

J. Lancet, Capital
Date PR
(a)

Debit

No. 250
Credit
Balance
43,100
43,100
14,400
57,500

No. 301
Credit
Balance
283,200 283,200

J. Lancet, Withdrawals
Date PR
(o)

Debit
10,450

Credit

No. 302
Balance
10,450

Engineering Fees Earned

Equipment Rental Expense

Credit

No. 164
Balance
80,000
104,000

Date PR
(j)

Credit

No. 602
Balance
1,410

Credit

No. 170
Balance
55,000

Advertising Expense
Date PR Debit
Credit
(q)
2,400

No. 603
Balance
2,400

Repairs Expense

Credit

No. 172
Balance
52,000

No. 604
Balance
970

Date PR
(n)

Debit

No. 402
Credit
Balance
6,600
6,600
14,500
21,100
23,000
44,100

Credit

Land
Date PR
(b)

Notes Payable

Wages Expense
Date PR Debit
(l)
2,500
(p)
2,000

Building
Date PR
(c)

1,100

No. 163
Balance
8,200
9,300

Credit

Drafting Equipment
Date PR
(a)
(f)

Debit

Balance
2,300

No. 108

Office Equipment
Date PR
(a)
(h)

Date PR
(h)
(j)
(m)

No. 201
Credit
Balance
1,100
1,100
1,410
2,510
1,410

Date PR
(e)
(g)
(i)

Prepaid Insurance
Date PR
(d)

Accounts Payable

Debit
1,410

Debit
970

Credit

Credit

No. 601
Balance
2,500
4,500

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Fundamental Accounting Principles, 19th Edition

Problem 2-1A (Concluded)


Part 3
LANCET ENGINEERING
Trial Balance
June 30
Debit

Credit

Cash............................................................. $114,380
Accounts receivable .................................. 29,500
Prepaid insurance ......................................
2,300
Office equipment ........................................
9,300
Drafting equipment .................................... 104,000
Building ....................................................... 55,000
Land............................................................. 52,000
Accounts payable.......................................
Notes payable .............................................
J. Lancet, Capital........................................
J. Lancet, Withdrawals............................... 10,450
Engineering fees earned............................
Wages expense ..........................................
4,500
Equipment rental expense.........................
1,410
Advertising expense ..................................
2,400
Repairs expense.........................................
970
Totals........................................................... $386,210

1,410
57,500
283,200
44,100

$386,210

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