CHAPTER 3 Processing Accounting Information

OVERVIEW OF EXERCISES, PROB E!S, A"# CASES

earning O%&ecti'e E(ercises Estimate$ Time in !inutes e'e)

*+ Explain the difference between an external and an internal event. ,+ Explain the role of source documents in an accounting system. 3+ Analyze the effects of transactions on the accounting equation.

1 2

10 10 1! 1! 20 10 10 20 20 0 10 20 10 20 10 10 10 20 20 0 1! 20 0 1! 2! 10

Easy Easy "od "od "od "od "od "od "od "od Easy "od "od "od "od Easy %iff "od "od "od "od "od "od "od "od "od

# ! 10$ 11$ 12$ 1#$ 1!$ -+ %escribe the use of the account and the general ledger to accumulate amounts for financial statement items. & 10$ 11$ 12$ 1 $ ' ( 12$ 1#$ 1!$ 1&$ 1#$ 1!$ 1&$ * 1 $

.+ Explain the rules of debits and credits.

/+ Explain the purposes of a )ournal and the posting process.

0+ Explain the purpose of a trial balance. $Exercise+ problem+ or case covers two or more learning ob)ectives ,evel - %ifficulty levels. Easy/ "oderate 0"od1/ %ifficult 0%iff1

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earning O%&ecti'e

Pro%)ems an$ A)ternates

Estimate$ Time in !inutes

e'e)

*+ Explain the difference between an external and an internal event.

1 !$ &$ '$ !$ 2 # &$ '$ ($ *$ 11$ 12$ 1 $ 1#$ 1!$

20 #! '! '! #! &0 &0 &0 '! '! 20 &0 0 #! 0 '! '! &0 &0 #! 0 20 &0 0 #! 0 '! '! 0 '! '! &0 #! 0 '! '!

Easy "od "od "od "od "od "od %iff "od "od "od "od "od "od %iff "od "od "od "od "od %iff "od "od "od "od %iff "od "od "od "od "od "od "od %iff "od "od

,+ Explain the role of source documents in an accounting system. 3+ Analyze the effects of transactions on the accounting equation.

-+ %escribe the use of the account and the general ledger to accumulate amounts for financial statement items.

*$ 10$ 12$ 1 $$ ($ *$ 11$ 12$ 1 $ 1#$ 1!$ 11$ 1#$ 1!$ 10$ 12$$ 1 $ 1#$ 1!$;

.+ Explain the rules of debits and credits.

/+ Explain the purposes of a )ournal and the posting process.

0+ Explain the purpose of a trial balance.

$Exercise+ problem+ or case covers two or more learning ob)ectives $$Alternate problem only ; 6riginal problem only ,evel - %ifficulty levels. Easy/ "oderate 0"od1/ %ifficult 0%iff1

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earning O%&ecti'e

Cases

Estimate$ Time in !inutes

e'e)

*+ Explain the difference between an external and an internal event.

$ !$ &$ #$ 2 $ #$ !$ &$ '$ 1 !$ '$ '$

20 &0 0 &0 1! 20 &0 &0 0 0 0 &0 0 0

"od "od "od %iff "od "od %iff "od "od "od "od "od "od "od

,+ Explain the role of source documents in an accounting system. 3+ Analyze the effects of transactions on the accounting equation.

-+ %escribe the use of the account and the general ledger to accumulate amounts for financial statement items. .+ Explain the rules of debits and credits. /+ Explain the purposes of a )ournal and the posting process. 0+ Explain the purpose of a trial balance. $Exercise+ problem+ or case covers two or more learning ob)ectives ,evel - %ifficulty levels. Easy/ "oderate 0"od1/ %ifficult 0%iff1

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23ESTIO"S *+ ?oth external and internal events affect an entity. An external event involves interaction with someone outside of the entity. 2or example+ the purchase of land is an external event. An internal event ta@es place entirely within the entity+ with no interaction with anyone outside of the company. 8he transfer of raw materials into production is an internal event. :ource documents are the basis for recording transactions. 8hey provide the evidence+ or documentation+ needed to recognize an event for accounting purposes. =urchase invoices+ time cards+ and cash register tapes are all examples of source documents. 5ash can ta@e many different forms. 6ne of the most common forms is a chec@ing account. 6ther forms include coin and currency on hand+ savings accounts+ money orders+ certified chec@s+ and cashierAs chec@s. An account receivable is an open account with a customer. 8hat is+ the customer is not required to have prior written approval each time a purchase is made+ and no interest is charged. "ost open accounts must be paid in a short period of time+ such as 0 or &0 days. A note receivable+ however+ involves a written promise from the customer to repay a specified amount+ with interest+ at a specified date. 5ompanies usually require customers to sign promissory notes for relatively large dollar amounts of purchases. Assets and liabilities are opposites. An asset represents a future benefit+ and a liability is an obligation to relinquish benefits in the future. 8herefore+ an account payable is the opposite of an account receivable. 3f Ace 5orp. provides a service to ?lue 5orp.+ Ace records an account receivable on its boo@s. ?lue will record an account payable on its boo@s. According to the accounting equation+ assets are equal to liabilities plus ownersB equity. Assets are future economic benefits. 8he right side of the equation is merely a representation of the claims of various groups on the assets. 8he claims of the owners+ as represented by ownersB equity+ are divided into two types. capital stoc@ and retained earnings. 8he former arises from amounts contributed by the owners to the business. >etained earnings represents the claims of the owners on the assets from the undistributed income of the business. 8hat is+ it represents the accumulated earnings over the life of the business that have not been returned to the owners in the form of dividends. 8he term CdoubleDentry systemE of accounting means that every transaction is entered in at least two accounts on opposite sides of 8 accounts. 3n this system+ every transaction is recorded in such a way that the equality of debits and credits is maintained+ and in the process the accounting equation is @ept in balance.

,+

3+

-+

.+

/+

0+

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4+

Assets and liabilities appear on different sides of the accounting equation and are therefore opposites. 3t is logical that if an asset is increased with a debit+ a liability is increased with a credit. Assets are positive in that they represent future economic benefits. 3t is merely a matter of convention that an asset is increased with a debit. An expense is negative in the sense that it reduces net income+ which in turn reduces retained earnings+ one of the two elements of ownersB equity. ?ecause ownersB equity is on the opposite side of the accounting equation from assets+ it is increased with a credit. 8herefore+ any item that reduces ownersB equity+ li@e an expense+ is itself increased with a debit. 8here are two sides to every transaction. 8he two sides of the transaction when a dividend is paid are the decrease in cash and the decrease in ownersB equity 0ownersB equity is reduced because money is being returned to owners+ and they have a smaller claim on the assets of the business1. Assets are increased with debits and decreased with credits. 5ash is an asset and is therefore decreased with a credit. >etained earnings is on the opposite side of the accounting equation from assets and is therefore increased with a credit. >etained earnings are decreased with a debit. ?ecause dividends are a decrease in retained earnings+ they are increased with a debit. Fhen you deposit money in your account+ the ban@ has a liability. 8he entry on the ban@Bs boo@s consists of a debit to 5ash and a credit to some type of liability account+ such as 5ustomersA %eposits. 8herefore+ when you ma@e a deposit+ the ban@ GcreditsG your account/ that is+ it increases its liability. A business actually saves time by first recording transactions in a )ournal and then posting them to the ledger. ?ecause of the sheer volume of transactions it would be impractical to prepare financial statements directly from the )ournal. 2or example+ without the use of ledger accounts+ it would be necessary at the end of the period to go bac@ and scan the )ournal to find every debit and credit to the 5ash account in order to prepare a balance sheet. Fhereas the )ournal serves as a boo@ of original entry+ the ledger accounts are the basis for preparing a trial balance+ which in turn is used to prepare the financial statements. 8he 8 account is a simple device used in the study of accounting as well as by accountants in analyzing transactions. 8he left side of the account is used to record debits and the right side to record credits. 8he running balance form for an account is more formal and includes not only columns for debits and credits+ but also a column for the balance in the account. Another important element of the running balance form is a posting reference column. 8he accountant places the page number of the general )ournal in this column so that each entry in the account can be traced bac@ to the relevant page in the )ournal.

5+

*6+

**+

*,+

*3+

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At the time of posting+ the posting reference column of the account in the ledger is filled in with the page number of the )ournal entry. At the same time+ the account number is placed in the posting reference column of the )ournal. 8his crossDreferencing system used in posting allows the accountant to trace an entry made in the )ournal to the account it was posted to+ or+ conversely+ to trace from an account bac@ to the entry in the )ournal. 8here is no standard rule about the frequency of posting entries from the )ournal to the ledger. 8he size of the company and the extent to which the accounting system is computerized will affect how often entries are posted. 2or example+ in a computerized system+ it is possible for entries to be posted instantaneously to the ledger at the time they are recorded in the )ournal. A trial balance proves the equality of debits and credits. 3t does not prove that the correct accounts were debited and credited or that the correct amounts were necessarily recorded. 3t simply ensures that the balance of all of the debits in the ledger accounts is equal to the balance of all of the credits at any point in time.

*.+

*/+

EXERCISES O* *+ ,+ 3+ -+ E E 4> E
EXERCISE 31* T7PES OF EVE"TS

.+ /+ 0+ 4+

3 4> E 3$

$8his can be used as an introduction to the concept of ad)ustments in 5hapter #H3t is an internal event if the accountant accrues the taxes owed but not yet paid/ alternatively+ it is an external transaction if the taxes are paid at the time the accountant determines the amount due. O, *+ ,+ 3+ -+ g h f d
EXERCISE 31, SO3RCE #OC3!E"TS !ATCHE# WITH TRA"SACTIO"S

.+ /+ 0+ 4+

c a b e

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EXERCISE 313 THE EFFECT OF TRA"SACTIO"S O" THE ACCO3"TI"8 E23ATIO"

*+ ,+ 3+ -+ .+ /+ 0+ 4+ 5+

Assets 4E 3 3 % 4E 3 % % 3

ia%i)ities 4E 4E 4E % 4E 3 4E 4E 4E

Stoc;<o)$ers= E>uit? 4E 3 3 4E 4E 4E % % 3

O3 T?@e

EXERCISE 31- T7PES OF TRA"SACTIO"S

E(am@)e

*+ a+ =urchase inventory on credit. %+ =urchase land in exchange for promissory note. ,+ a+ 3ssuance of stoc@ in exchange for cash. %+ =rovide service in exchange for cash. 3+ a+ >epay ban@ loan with cash. %+ =ay supplier amount owed on open account. -+ a+ =ay dividend to stoc@holders. %+ =ay wages to employees. .+ a+ 5ollect amount owed from customer on open account. %+ =urchase inventory with cash.

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Trans+ "o+ 1. 2. ?al. . ?al. #. ?al. !. ?al. &. ?al. '. ?al. (. ?al. *. ?al. I I I I I I I I

EXERCISE 31. A"A 7AI"8 TRA"SACTIO"S

Assets
Cas< Accounts Recei'a%)e I 1+! 0 I I '!0 '!0 J#+2#0 0 +#*01 2+!00 0**01 (*0 01001 I I 1+! 0 J(*0 &#0 I 1+ &! I #+2#0 I 01001 J#+000 0#+1001 J!00 0#+&001 I &#0 I 1+ &! I #+2#0 I !0+000 I &#0 I 1+ &! I #+2#0 I !0+000 I &#0 I 1+ &! I #+2#0 I !0+000 !0+000 I 1+ &! I #+2#0 I 1+! 0 I 1+ &! I 1+! 0 I 1+ &! I I #+2#0 #+2#0 1+! 0 I 1+ &! 1+ &! Su@@)ies E>ui@ment an$

ia%i)ities
Accounts Pa?a%)e "otes Pa?a%)e

Stoc;<o)$ersB E>uit?
Ca@ita) Stoc; Retaine$ Earnings I 1+! 0

I I

1+ &! 1+ &! I 1+! 0 '!0

1+ &!

2+2(0

1+ &! I 2+!00 2+!00

2+2(0

1+ &!

2+2(0

1+ &!

2+!00 I !0+000 !0+000

2+2(0

1+ &!

2+!00

2+2(0 J#+000

1+ &! J!00

2+!00

!0+000

01+'201

(&!

2+!00

!0+000

01+'201

TOTA ASSETSC D.*,/-.

TOTA IABI ITIES A"# STOCEHO #ERSB E23IT7C D.*,/-.

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O*+ ,+ 3+ -+ .+ /+

EXERCISE 31/ BA A"CE SHEET ACCO3"TS A"# THEIR 3SE

4otes =ayable 3nvestments Accounts >eceivable 8axes =ayable =referred :toc@ ,and

0+ 4+ 5+ *6+ **+

Accounts =ayable 5ash ?uildings >etained Earnings =repaid Asset

O. *+ ,+ 3+ -+ .+ /+

EXERCISE 310 "OR!A ACCO3"T BA A"CES FAPPE"#IXG

%ebit %ebit 5redit 5redit %ebit 5redit

0+ 4+ 5+ *6+ **+

5redit %ebit 5redit %ebit %ebit

O.

EXERCISE 314 #EBITS A"# CRE#ITS FAPPE"#IXG

8he debits and credits are reversed in this entry. 8he correct entry is. Kune ! 5ash Accounts >eceivable :ales >evenue 8o record cash received on Kune !. I10+000 on account and I2+#!0 in cash sales. Assets :*,,-.6 H*6,666 9 ia%i)ities : 12+#!0 10+000 2+#!0

Stoc;<o)$ersB E>uit? :,,-.6

2rom the ban@As perspective+ a customerAs account is a liability because the ban@ owes that amount to the customer. 8hus+ when the liability account is increased+ it is increased with a credit. At the same time+ the cash received from the customer is an increase in the ban@As cash and+ as an asset+ cash is increased with a debit.

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EXERCISE 315 TRIA BA A"CE FAPPE"#IXG

SPE"CER CORPORATIO" TRIA BA A"CE #ECE!BER 3*, ,660 5ash Accounts >eceivable 6ffice :upplies ,and Automobiles ?uildings Equipment Accounts =ayable 3ncome 8axes =ayable 4otes =ayable 5apital :toc@ >etained Earnings 5ommissions >evenue 3nterest >evenue 5ommissions Expense <eat+ ,ight+ and Fater Expense 3ncome 8ax Expense 6ffice :alaries Expense %ividends 8otals #r+ I 10+!00 !+ 2! !00 !0+000 *+200 1!0+000 (!+000 I Cr+

'+&!0 2+!00 *0+000 100+000 110+02! 12+'!0 1+ 00

2+&00 1+#00 1+'00 &+000 2+000 I 2#+22!

LLLLLL I 2#+22!

!3 TI1CO"CEPT EXERCISES

O 3,-

EXERCISE 31*6 #ETER!I"I"8 A" E"#I"8 ACCO3"T BA A"CE

I2+000 M I1+#00 M I2!0 I1+ !0 - I2+ 00

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EXERCISE 31** RECO"STR3CTI"8 A BE8I""I"8 ACCO3"T BA A"CE

?eginning balance M :ervices on account ?eginning balance M I'+!00 ?eginning balance - I1+000

J 5ollections - Ending balance J I&+000 - I2+!00

O 3,-,.

EXERCISE 31*, IO3R"A E"TRIES RECOR#E# #IRECT 7 I" T ACCO3"TS FAPPE"#IXG

Cas< 1*+!00 1 0 12! 1!+000 200 1*+(2! 1!+1 0 ?al. #+&*! F*G F-G F0G Van 1!+000

F,G F/G

Accounts Recei'a%)e F.G 200 200 F0G F,G ?al. D0D

Office Su@@)ies 1 0

F3G

Accounts Pa?a%)e F/G 1!+000 1!+000 F3G D0D?al.

Ca@ita) Stoc; 1*+!00 F*G

#e)i'er? Ser'ices 12! F-G 200 F.G 2! ?al.

O -,0

EXERCISE 31*3 TRIA BA A"CE FAPPE"#IXG

WE18O #E IVER7 SERVICE TRIA BA A"CE #ECE!BER 3*, ,660 5ash 6ffice :upplies Nan 5apital :toc@ %elivery :ervices 8otals #r+ I #+&*! 1 0 1!+000 I 1*+(2! Cr+

I 1*+!00 2! I 1*+(2!

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EXERCISE 31*- IO3R"A E"TRIES FAPPE"#IXG

*+ Accounts >eceivable :ales >evenue "ade sales on open account. Assets :*,.36 ,+ 9 ia%i)ities :

1+! 0 1+! 0 Stoc;<o)$ersB E>uit? :*,.36 1+ &! 1+ &! : Stoc;<o)$ersB E>uit? '!0 '!0

:upplies Accounts =ayable =urchased supplies on open account. Assets :*,3/. 9 ia%i)ities :*,3/.

3+ 5ash :ales >evenue "ade cash sales. Assets :0.6 9 ia%i)ities :

Stoc;<o)$ersB E>uit? :0.6 #+2#0 #+2#0

-+ Equipment 5ash =urchased equipment with cash. Assets :-,,-6 H-,,-6 9 ia%i)ities :

Stoc;<o)$ersB E>uit?

.+ 5ash 4otes =ayable 3ssued promissory note for cash. Assets :,,.66 9 ia%i)ities :,,.66 :

2+!00 2+!00 Stoc;<o)$ersB E>uit? (*0 (*0

/+ 5ash Accounts >eceivable 5ollected open accounts. Assets :456 H456

EXERCISE 31*- FConc)u$e$G

ia%i)ities

Stoc;<o)$ersB E>uit?

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0+ ,and 5apital :toc@ 3ssued capital stoc@ in exchange for land. Assets :.6,666 9 ia%i)ities :

!0+000 !0+000 Stoc;<o)$ersB E>uit? :.6,666 #+000 #+000

4+ :alary and Fage Expense 5ash =aid salaries and wages. Assets H-,666 5+ Accounts =ayable 5ash =aid open account. Assets H.66 O 3,.,/ April 1 9 ia%i)ities H.66 : 9 ia%i)ities :

Stoc;<o)$ersB E>uit? H-,666 !00 !00 Stoc;<o)$ersB E>uit?

EXERCISE 31*. IO3R"A E"TRIES FAPPE"#IXG

5ash 5apital :toc@ 3ssued 100+000 shares of capital stoc@. Assets :*66,666 9 ia%i)ities :

100+000 100+000 Stoc;<o)$ersB E>uit? :*66,666 !0+000 !0+000

April #

5ash 4otes =ayable 3ssued &Dmonth+ *O promissory note for cash. Assets :.6,666 9 ia%i)ities :.6,666 :

Stoc;<o)$ersB E>uit?

April (

,and 20+000 ?uildings 5ash =urchased land and a storage shed. Assets :,6,666 :/6,666 H46,666 9 ia%i)ities :

&0+000 (0+000 Stoc;<o)$ersB E>uit?

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EXERCISE 31*. FConc)u$e$G

April 10

"owing Equipment 5ash Accounts =ayable =urchased mowing equipment with down payment and remainder due by end of month. Assets :,.,666 H*6,666 9 ia%i)ities :*.,666 :

2!+000 10+000 1!+000

Stoc;<o)$ersB E>uit?

April 1(

Accounts >eceivable :ervice >evenue ?illed customers for services provided on account/ amounts due within 10 days. Assets :.,.66 9 ia%i)ities :

!+!00 !+!00

Stoc;<o)$ersB E>uit? :.,.66 1!+000 1!+000

April 2'

Accounts =ayable 5ash =aid remaining balance due on open account for purchase of mowing equipment. Assets H*.,666 9 ia%i)ities H*.,666 :

Stoc;<o)$ersB E>uit? !+!00 !+!00

April 2(

5ash Accounts >eceivable 5ollected cash on open accounts. Assets :.,.66 H.,.66 9 ia%i)ities :

Stoc;<o)$ersB E>uit?

April 0

Accounts >eceivable :ervice >evenue ?illed customers for services provided on account. Assets :5,4.6 9 ia%i)ities :

*+(!0 *+(!0

Stoc;<o)$ersB E>uit? :5,4.6 #+&!0 #+&!0

April 0

:alary and Fage Expense 5ash =aid April payroll. Assets 9 ia%i)ities :

Stoc;<o)$ersB E>uit?

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H-,/.6

H-,/.6

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EXERCISE 31*/ THE PROCESS OF POSTI"8 IO3R"A E"TRIES TO 8E"ERA E#8ER ACCO3"TS FAPPE"#IXG

#ate Kune 1

8enera) Iourna) Post+ Account Tit)e an$ E(@)anation Ref+ ,and 1' !0+000 4otes =ayable ! =urchased land in exchange for note. 8enera) e$ger

Page "o+ 0 #e%it Cre$it !0+000

an$ #ate Kune 1 E(@)anation Post+ Ref+ 9K ' Post+ Ref+ 9K ' #e%it !0+000

Account "o+ *0 Cre$it Ba)ance !0+000

"otes Pa?a%)e #ate Kune 1 E(@)anation #e%it

Account "o+ 3. Cre$it !0+000 Ba)ance !0+000

8he purpose of the )ournal is to provide a chronological record of the entries. 3n addition+ it shows the complete transaction in one place. 8hus+ if you wanted to review this particular transaction+ you would loo@ at the general )ournal.

PROB

E!S

O*

PROB E! 31* EVE"TS TO BE RECOR#E# I" ACCO3"TS

*+ E 4ot recorded ,+ E >ecorded. 3nventory+ Accounts =ayable 3+ 3 4ot recorded -+ E 4ot recorded .+ 3 4ot recorded /+ E >ecorded. 5ash+ :ales >evenue 0+ E 4ot recorded 4+ E >ecorded. :alaries and Fages Expense+ 5ash

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5+ E >ecorded. Accounts =ayable+ 5ash

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PROB E! 31, TRA"SACTIO" A"A 7SIS A"# FI"A"CIA STATE!E"TS

*+ Kust >olling Along 3nc. 8ransactions for the month of "ay 200'.
Assets #ate Cas< !P1 I 1(+000 !P1 ?al. I 1(+000 !P! !P* !P10 ?al. I 1 +!(! !P1! !P1' !P2# ?al. I 1!+2&0 !P2* !P 0 !P 0 !P 1 &00 I I I I +000 &00 &00 &00 I'+#00 I'+#00 I '+#00 I 100 I 100 I 100 I +100 I +100 J +000 I 100 I1(+000 I !+'00 TOTA ASSETSC D,3,466 TOTA IABI ITIES A"# STOCEHO #ERSB E23IT7C D,3,466 I1(+000 I1(+000 I I J1&0 J +000 ?al. I 1!+(&0 ?al. I 1(+(&0 ?al. I 1(+'00 ?al. I 1!+'00 J12! I'+#00 I'+#00 I 1+200 I 1+200 J&00 &00 I'+#00 I 100 I +100 I1(+000 I 2+(&0 +000 !+(&0 J1&0 !+'00 I'+#00 I 100 I +100 I1(+000 I I 100 I 100 I +100 I +100 I1(+000 I1(+000 I I 1+(00 ?al. I 1 +#&0 ?al. I 1!+2&0 I'+#00 J1! I +000 #+#00 I'+#00 I 100 I 100 I +000 100 I +100 I1(+000 I 01!1 J12! 01#01 1+(00 1+&&0 1+200 2+(&0 I1(+000 I 01!1 I +000 I1(+000 J#+#00 ?al. I 1'+*(! ?al. I 1 +!(! Accounts Recei'a%)e E>ui@ment Su@@)ies I +000 I +000 9 ia%i)ities Accounts Pa?a%)e I +000 I +000 I1(+000 I I J1! 01!1 :Stoc;<o)$ersB E>uit? Ca@ita) Retaine$ Stoc; Earnings I1(+000

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PROB E! 31, FConc)u$e$G

,+

I3ST RO I"8 A O"8 I"C+ I"CO!E STATE!E"T FOR THE !O"TH E"#E# !A7 3*, ,660 >evenues. >ental fees$ ,essons Expenses. >egistration fee Advertising :alaries and wages 4et income $I1+(00 M I +000 I #+(00 1+200 I 1! 12! 1&0

I &+000

00 I !+'00

3+

I3ST RO I"8 A O"8 I"C+ BA A"CE SHEET !A7 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable :upplies 8otal current assets =roperty+ plant+ and equipment. Equipment 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity I 1!+'00 &00 100 I 1&+#00 '+#00 I 2 +(00 I I 1(+000 !+'00 2 +'00 I 2 +(00 100

-+ 9iven the line of business that they are in+ the two college students may be concerned about their liability. 6ne of the advantages of incorporating is the limited liability of the stoc@holders. 9enerally+ a stoc@holder is liable only for the amount contributed to the business.

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PROB E! 313 TRA"SACTIO" A"A 7SIS A"# FI"A"CIA STATE!E"TS

EXPERT CO"S3 TI"8 SERVICES I"C+ TRA"SACTIO"S FOR THE !O"TH OF !ARCH ,660
Assets 9 Accounts Recei'a%)e Com@uter Su@@)ies ia%i)ities : Accounts "otes Pa?a%)e Pa?a%)e Stoc;<o)$ersB E>uit? Ca@ita) Retaine$ Stoc; Earnings

#ate

Cas<

P2 P' P12

I#0+000 1!+000 I'00 I'00 I #+000 I#+000 I#+000 J1+000 I +000 I +000 I (+000 I +000 I +000 I +000 I(+000 I(+000 I (+000 I'00 I'00 I'00 I'00 I'00 I'00 I1!+000 I1!+000 I1!+000 I'00 I'00 I'00 I'00 I1!+000 I1!+000 I'00 I'00 I'00 I'00 I1!+000 I1!+000 I'00 I'00 I1!+000 I1!+000 I1!+000

I#0+000 I#0+000 I#0+000 I #+000 I#0+000 I#0+000 I#0+000 I#0+000 I#0+000 I#0+000 I#0+000 I #+000 J1+ 00 I 2+'00 I 2+'00 2+(00 I !+!00 I !+!00 J + 00 I 2+200 J1+#00 I (00

?al. I!!+000 ?al. I!!+000 P1* ?al. I!!+000 P20 P22 P2& P2* P 0 P 1 J1+ 00 1+000 2+(00 J(+000 J + 00 J1+#00 ?al. I! +'00 ?al. I!#+'00 ?al. I!'+!00 ?al. I#*+!00 ?al. I#&+200 ?al. I##+(00

TOTA ASSETSC D./,.66

TOTA IABI ITIES A"# STOCEHO #ERS= E23IT7C D./,.66

31,6

234A453A, A556748349 :6,78364: "A47A,

PROB E! 313 FConc)u$e$G

,+

EXPERT CO"S3 TI"8 SERVICES I"C+ I"CO!E STATE!E"T FOR THE !O"TH E"#E# !ARCH 3*, ,660 >evenues. 5omputer installation services :oftware selection services Expenses. Advertising :alaries and wages 9as+ electric+ and water 4et income I#+000 2+(00 I1+ 00 + 00 1+#00

I &+(00

&+000 I (00

3+

EXPERT CO"S3 TI"8 SERVICES I"C+ BA A"CE SHEET !ARCH 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable :upplies 8otal current assets =roperty+ plant+ and equipment. EquipmentH5omputer system 8otal assets ia%i)ities an$ Stoc;<o)$ers= E>uit? 5urrent liabilities. Accounts payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersB equity 8otal liabilities and stoc@holdersB equity I ##+(00 +000 '00 I #(+!00 (+000 I !&+!00 I '00

1!+000 I 1!+'00 I #0+000 (00 #0+(00 I !&+!00

4. Trade accounts often have a 30- day collection or payment period. For example, cash should be received from the accounts receivable and cash paid for the accounts payable during the month of April.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31,*

O3

PROB E! 31- TRA"SACTIO"S RECO"STR3CTE# FRO! FI"A"CIA STATE!E"TS E ! CORPORATIO" TRA"SACTIO"S FOR THE !O"TH OF I3"E ,660

Cas<

Accounts Recei'a%)e

Assets E>ui@ment

Bui)$ing

an$

Accounts Pa?a%)e

ia%i)ities "otes Pa?a%)e

Ca@ita) Stoc;

Stoc;<o)$ersB E>uit?JJJJJ Retaine$ Earnings

1. 2.

I 0+000 I1(+000 I 1(+000 I *0+000 I 1(+000 I 1(+000 I * +&00 I * +&00 '2+000 I 21+&00 I 21+&00 I 21+&00 I 21+&00 I21+&00 I 1(+000 I 1(+000 I 1(+000 I 1(+000 I 1(+000 I *0+000 I *0+000 I *0+000 I *0+000 I *0+000 I 2#+000 I 2#+000 I 2#+000 I 2#+000 I2#+000 I 1(+000 I 1(+000 I 1(+000 I 1(+000 I1(+000 TOTA I *0+000 I *0+000 I *0+000 I *0+000 I *0+000 I 1(+000 I *0+000 I 2#+000 I 1(+000 I *0+000 I*0+000 I 2#+000 I *0+000 I 2#+000 I1(+000 I *0+000 I1(+000 2#+000 I1(+000 I 1(+000 I *0+000 I *0+000

I 0+000 I 0+000 I 0+000 I 0+000 I * +&00 I 0+000 I 0+000 I 0+000 I 0+000 I 0+000 I 0+000 I * +&00 I * +&00 *+000 I (#+&00 2'+*00 I !&+'00 1 +(00 I #2+*00 #+!00 I (+#00 TOTA ASSETSC D*0/,-66 IABI ITIES A"# STOCEHO #ERSB E23IT7C D*0/,-66

?al. I 0+000 . ?al. I 0+000 #. !. ?al. I &+000 &. '. (. *. 10. '2+000 *+000 2'+*00 1 +(00 #+!00 ?al. I '(+000 ?al. I &*+000 ?al. I #1+100 ?al. I 2'+ 00 ?al. I 22+(00 ?al. I &+000

Assumptions. 1. 8he land was acquired for cash. 2. All sales were on account. . 5ash dividends were paid 0for the difference between the ending balance in >etained Earnings and 4et 3ncome1.

31,,

234A453A, A556748349 :6,78364: "A47A,

!3 TI1CO"CEPT PROB E!S O *,,

PROB E! 31. I#E"TIFICATIO" OF EVE"TS SO3RCE #OC3!E"TS WITH

All of these events would be recorded in the entityBs accounts. a+ =ayment of the insurance policy would be recorded with the use of the invoice from the insurance company. 8he amount and period covered would be used to record the event. %+ :ource documents for the payroll include time cards or sheets and employment contracts. 8he time cards or sheets are normally used to record the payroll. 8he main item needed from the time cards is the number of hours wor@ed during the period. 8he employment contracts may specify the hourly rate of pay or a periodic salary. c+ A sales invoice is used to record a sale of merchandise on account. 8he amount of the sale is ta@en from this source document. $+ :ource documents are needed to record the reduction in supplies and the amount of loss from the fire. 3nvoices for supplies purchased+ and requisition forms for supplies+ are important source documents for this purpose. ?y deducting the amount used+ as shown on the requisition forms+ from the amount bought+ per the invoices+ one could determine the amount of loss. e+ "any companies send periodic invoices to customers with a tearDoff portion that is mailed bac@ to the company along with the chec@. 8he amount received and the customer name is used to record the transactions. f+ A bill of sale is normally generated from a purchase of land. 8he purchase price and the amount paid+ including any part of this that was financed+ would be needed to record the purchase.

g+ For@ papers and other documents generated by the tax department are used to record the amount of taxes due. 8he amount due is needed to record the transaction. <+ 8he lease agreement itself serves as the source document to record this event. 8he amounts paid for taxes+ title+ and license are recorded on the basis of the lease agreement.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31,3

O *,3

PROB E! 31/ TRA"SACTIO" A"A 7SIS A"# FI"A"CIA STATE!E"TS

*+

B 3E IA7 #E IVER7 SERVICE TRA"SACTIO"S FOR THE !O"TH OF IA"3AR7 ,660 Assets an$ Ware<ouse 9 #e)i'er? Truc;s ia%i)ities Accounts Pa?a%)e : "otes Pa?a%)e Stoc;<o)$ersB E>uit? Ca@ita) Retaine$ Stoc; Earnings

Trans+ #ate

Cas<

Accounts Recei'a%)e

1P2 1P

I 100+000 (0+000 I 20+000 I 20+000 I &0+000 I &0+000 I !0+000 I 20+000 I &0+000 I #!+000 I 20+000 I 1!+*00 I 1!+*00 J'+#*0 I (+#10 I 20+000 I &0+000 I #!+000 I +2 0 2+#*0 I (+#10 I 20+000 TOTA I &0+000 I #!+000 I +2 0 I !0+000 I !0+000 I 20+000 I &0+000 I #!+000 I !0+000 I &0+000 I #!+000 I !0+000 I !0+000

I 100+000

?al. I 20+000 1P# !0+000

I 100+000

?al. I '0+000 1P& J#!+000

I 100+000

?al. I 2!+000 1P 1 ?al. I 2!+000 1P 1 ?al. I 1P 1 ?al. I '+#*0 2+#*0

I 100+000 I 1!+*00 I 100+000 I 1!+*00

I 100+000

I 1!+*00 J +2 0

I 100+000

I 12+&'0

TOTA ASSETSC D*/.,566

IABI ITIES A"# STOCEHO #ERSB E23IT7C D*/.,566

31,-

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31/ FContinue$G

,+

B 3E IA7 #E IVER7 SERVICE I"CO!E STATE!E"T FOR THE !O"TH E"#E# IA"3AR7 3*, ,660 :ervice revenue 9as and oil expense 4et income I 1!+*00 +2 0 I 12+&'0

3+

B 3E IA7 #E IVER7 SERVICE BA A"CE SHEET IA"3AR7 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable 8otal current assets =roperty+ plant+ and equipment. ,and Farehouse %elivery truc@s 8otal property+ plant+ and equipment 8otal assets ia%i)ities an$ Stoc;<o)$ers= E>uit? 5urrent liabilities. Accounts payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersB equity 8otal liabilities and stoc@holdersB equity

2+#*0 (+#10 I #0+*00

I 20+000 &0+000 #!+000 12!+000 I 1&!+*00 I +2 0

!0+000 I ! +2 0 I 100+000 12+&'0 112+&'0 I 1&!+*00

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31,.

PROB E! 31/ FConc)u$e$G

-+ Additional information needed. Ian+ 3C 3s the warehouse newQ <ow large is itQ Fhat volume of business can it supportQ Ian+ -C Fhat is the interest rate on the loanQ Are there any restrictions on the companyBs operations in the debt agreement 0covenants1Q Fere any assets offered as collateralQ Ian+ /C <ow long are the truc@s expected to lastQ Fill they have any salvage valueQ Fhat volume of business can they supportQ Ian+ 3*C Fhen will customers pay the remaining balanceQ Fhat is the credit standing of the customersQ Ian+ 3*C 3s there a limit on how much the company chargesQ Fhat if the company cannot pay by the 10thQ

31,/

234A453A, A556748349 :6,78364: "A47A,

O *,3 *+

PROB E! 310 TRA"SACTIO" A"A 7SIS A"# FI"A"CIA STATE!E"TS

"EVERA"ERROR, I"C+
TRA"SACTIO"S FOR THE !O"TH OF I3"E ,660
Assets 9 Accounts Recei'a%)e Com@uter Accounts Pa?a%)e ia%i)ities : "otes Rent Pa?a%)e Pa?a%)e Stoc;<o)$ersB E>uit? Ca@ita) Retaine$ Stoc; Earnings

#ate

Cas<

&P2 &P! &P( &P1! &P1' &P2 &P2( &P2*

I 0+000 J2+!00 20+000 I12+000 I12+ !0 I12+000 I12+000 I12+000 I12+000 I12+000 I12+000 I12+000 I12+000 I *+!00 I *+!00 I *+!00 I *+!00 I *+!00 I *+!00 I *+!00 I *+!00 TOTA D0-,546 I20+000 I20+000 I20+000 I20+000 I 2+200 0 0 I20+000 I20+000 I20+000 I20+000 I 2+200 I 2+200 I 2+200 I 2+200 I *+!00 I12+000 I12+000 I *+!00 I *+!00 I20+000 I20+000

I 0+000 I 0+000 I 0+000 I12+ !0 I 0+000 I 0+000 I 0+000 I 0+000 I 0+000 I 0+000 I 0+000 I 0+000 I12+ !0 J*00 I11+#!0 I11+#!0 J2+'00 0 I (+'!0 J2+200 I &+!!0 J!+&'0 I ((0 1(+#00 1(+#00 I1*+2(0 J&+000 I1 +2(0 IABI ITIES A"# STOCEHO #ERSB E23IT7C

?al. I2'+!00 ?al. I#'+!00 ?al. I#'+!00 I12+ !0 J*00 12+ !0 J12+ !0 0 J2+'00 ?al. I#&+&00 I12+ !0 ?al. I!(+*!0 I ?al. I!&+2!0 I ?al. I!&+2!0 I &P 0 &P 0 &P 0 J&+000 J!+&'0 ?al. I!0+!(0 I

?al. I!0+!(0 I1(+#00 ?al. I##+!(0 I1(+#00

TOTA ASSETSC D0-,546

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31,0

PROB E! 310 FContinue$G

,+a+

"EVERA"ERROR I"C+ I"CO!E STATE!E"T FOR THE !O"TH E"#E# I3"E 36, ,660 :ervice revenue Expenses. Advertising 7tilities >ent :alaries and wages 4et income I 0+'!0 I *00 2+'00 2+200 !+&'0

11+#'0 I 1*+2(0

,+%+

"EVERA"ERROR I"C+ STATE!E"T OF RETAI"E# EAR"I"8S FOR THE !O"TH E"#E# I3"E 36, ,660 ?eginning balance+ Kune 1+ 200' Add. 4et income %educt. %ividends Ending balance+ Kune 0+ 200' I 0 1*+2(0 0&+0001 I 1 +2(0

,+c+

"EVERA"ERROR I"C+ BA A"CE SHEET I3"E 36, ,660 Assets 5urrent assets. 5ash Accounts receivable 8otal current assets =roperty+ plant+ and equipment. 5omputer 8otal assets ia%i)ities an$ Stoc;<o)$ers= E>uit? 5urrent liabilities. Accounts payable >ent payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersB equity 8otal liabilities and stoc@holdersB equity

I ##+!(0 1(+#00 I &2+*(0 12+000 I '#+*(0 I *+!00 2+200

I 11+'00 20+000 I 1+'00

I 0+000 1 +2(0 # +2(0 I '#+*(0

31,4

234A453A, A556748349 :6,78364: "A47A,

PROB E! 310 FConc)u$e$G

3+ Res+ the outloo@ for the company loo@s relatively appealing. 8he company operated profitably during the month of Kune and was able to generate significant revenues and control its costs. 8he profit margin for the month was in excess of &0O. 3n addition+ it appears to be relatively liquid+ with a current ratio of over ! to 1.

O 3,.

PROB E! 314 ACCO3"TS 3SE# TO RECOR# TRA"SACTIO"S FAPPE"#IXG

a+ %+ c+ $+ e+

Accounts Accounts #e%ite$ Cre$ite$ 1 10 ! 1+ * & * ' 2 12

f+ g+ <+ i+ &+

#e%ite$ 1 1 1# 1! 1&

Cre$ite$ 2 1 1 ' (

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31,5

O 3,-,. *+

PROB E! 315 TRA"SACTIO" A"A 7SIS A"# IO3R"A E"TRIES RECOR#E# #IRECT 7 I" T ACCO3"TS FAPPE"#IXG

?everly Entertainment Enterprises transactions for the month of 6ctober+ 200'.

Accounts Recei'a%)e Assets an$ Bui)$ing Concession Su@@)ies 9 ia%i)ities Accounts "otes Pa?a%)e Pa?a%)e : Stoc;<o)$ersB E>uit? Ca@ita)Retaine$ Stoc; Earnings

Cas<

10P1 10P2 ?al. 10P ?al. 10P12 ?al. 10P1 ?al. 10P1' ?al. 10P2 ?al. 10P2# ?al. 10P2& ?al. 10P2' ?al. 10P 0 ?al. 10P 1

I #0+000 J12+!00 I 2'+!00 J2+!00 I 2!+000 LLLLLL I 2!+000 #+200 I 2*+200 I 2*+200 '!0 I 2*+*!0 #+(00 I #+'!0 J +000 I 1+'!0 J!00 I 1+2!0 J2+#00 I 2(+(!0 #+ 00 I1+!00 I 1+!00 J'!0 I '!0

I #0+000 I !+000 I !+000 I !+000 I !+000 I*0+000 I*0+000 !+000 I*!+000 I*!+000 LLLLL L I*!+000 LLLLL L I*!+000 LLLLL L I*!+000 LLLLLL I*!+000 LLLLLL I*!+000 LLLLLL I*!+000 I*!+000 I +'00 I +'00 I 112+!00 I112+!00 I2+!00 I2+!00 +'00 I&+200 I112+!00 I112+!00 I #0+000 L LLLLL I#0+000 I #0+000 I 1+(00 2+#00 I #+200 1+!00 !+'00 I !+'00 2+000 2+(00 I 10+!00 J +000 I '+!00 J!00 I '+000 J2+#00 I #+&00 1+(00

I !+000 I !+000 LLLLLL I !+000

I +'00 I +'00 LLLLLL I +'00

I&+200 L LLLL I&+200 LLLL I&+200

I112+!00 I112+!00 I112+!00

I#0+000 I #0+000 I #0+000

I I I I

'!0 '!0 '!0 '!0

I !+000 LLLLLL I !+000 LLL LLL I !,000 I !+000

I +'00 I +'00 I +'00 I +'00

I&+200 I&+200 I&+200 I&+200

I112+!00 I112+!00 I112+!00 I112+!00

I #0+000 I #0+000 I #0+000 I #0+000

2+!00 ?al. I
+1!0 I '!0 I !+000 I*!+000 I +'00 I&+200 I 112+!00 I #0+000 I (+*00

TOTA ASSETSC D*/0,/66

TOTA

IABI ITIES A"# STOCEHO #ERSB E23IT7C D*/0,/66

3136

234A453A, A556748349 :6,78364: "A47A,

PROB E! 315 FConc)u$e$G

,+ 010P11 010P1 1 010P2 1 010P2#1 010P 11

Cas< #0+000 12+!00 010P21 #+200 2+!00 010P 1 '!0 +000 010P2&1 #+(00 !00 010P2'1 #+ 00 2+#00 010P 01 !#+0!0 20+*00

Accounts Recei'a%)e 010P1'1 1+!00 '!0 010P2 1

?al.

'!0

?al.

+1!0 an$ !+000 Bui)$ing *0+000 !+000 *!+000 Accounts Pa?a%)e 2+!00 010P 1 +'00 010P121 &+200 "otes Pa?a%)e 112+!00 Ca@ita) Stoc; #0+000 ?al.

010P21

010P21 010P 1 ?al.

Concession Su@@)ies 010P121 +'00

010P21

010P11

Retaine$ Earnings 010P2&1 +000 1+(00 010P2'1 !00 2+#00 010P 01 2+#00 1+!00 2+000 2+(00 1+(00 2+!00 !+*00 1#+(00 (+*00

010P1 1 010P1 1 010P1'1 010P2#1 010P2#1 010P 11 010P 11 ?al.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

313*

O -,0 *+

PROB E! 31*6 TRIA BA A"CE A"# FI"A"CIA STATE!E"TS FAPPE"#IXG

BEVER 7 E"TERTAI"!E"T E"TERPRISES TRIA BA A"CE OCTOBER 3*, ,660 5ash Accounts >eceivable ,and ?uilding 5oncession :upplies Accounts =ayable 4otes =ayable 5apital :toc@ >etained Earnings 8otals I #r+ +1!0 '!0 !+000 *!+000 +'00 I Cr+

I 1&'+&00

&+200 112+!00 #0+000 (+*00 I 1&'+&00

,+

BEVER 7 E"TERTAI"!E"T E"TERPRISES I"CO!E STATE!E"T FOR THE !O"TH E"#E# OCTOBER 3*, ,660 >evenues. 8ic@et sales 5oncession sales >ental revenue Expenses. 7tilities :alaries and wages 4et income $I1+(00 M I2+000 M I1+(00 $$I2+#00 M I2+(00 M I2+!00 I !+&00$ '+'00$$ 1+!00 I !00 2+#00

I 1#+(00 2+*00 I 11+*00

3+

BEVER 7 E"TERTAI"!E"T E"TERPRISES STATE!E"T OF RETAI"E# EAR"I"8S FOR THE !O"TH E"#E# OCTOBER 3*, ,660 ?eginning balance+ 6ctober 1+ 200' Add. 4et income %educt. %ividends Ending balance+ 6ctober 1+ 200' I 0 11+*00 +000 I (+*00

313,

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*6 FConc)u$e$G

-+

BEVER 7 E"TERTAI"!E"T E"TERPRISES BA A"CE SHEET OCTOBER 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable 5oncession supplies 8otal current assets =roperty+ plant+ and equipment. ,and ?uilding 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable ,ongDterm debt. 4otes payable 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity

+1!0 '!0 +'00 I '+&00 !+000 *!+000

1 0+000 I 1&'+&00 I &+200 112+!00

I #0+000 (+*00 #(+*00 I 1&'+&00

O 3,.,/

PROB E! 31** IO3R"A E"TRIES FAPPE"#IXG

a+ 5ash 5apital :toc@ 3ssued 100+000 shares of capital stoc@ for cash. Assets 9 ia%i)ities : :,66,666 %+ ?uildings ,and 5ash Acquired building and land for cash. Assets 9 ia%i)ities :**6,666 :-6,666 H*.6,666 c+ 5ash 4otes =ayable :igned threeDyear promissory note. Assets 9 ia%i)ities :*,.,666 :*,.,666

200+000 200+000 Stoc;<o)$ersB E>uit? :,66,666 110+000 #0+000 1!0+000

Stoc;<o)$ersB E>uit?

12!+000 12!+000 : Stoc;<o)$ersB E>uit?

5<A=8E>

=>65E::349 A556748349 3426>"A8364

3133

PROB E! 31** FConc)u$e$G

$+ 6ffice Equipment 5ash Accounts =ayable =urchased equipment+ with down payment and balance due in 10 days. Assets 9 ia%i)ities : :.6,666 :-6,666 H*6,666 e+ Fage and :alary Expense 5ash =aid payroll for first half of month. Assets 9 ia%i)ities H*3,666 f+

!0+000 10+000 #0+000 Stoc;<o)$ersB E>uit?

1 +000 1 +000 : Stoc;<o)$ersB E>uit? H*3,666 #0+000 #0+000 Stoc;<o)$ersB E>uit? 2#+000 2#+000 : Stoc;<o)$ersB E>uit? :,-,666 1!+000 1!+000 : Stoc;<o)$ersB E>uit? H*.,666 +!00 +!00 Stoc;<o)$ersB E>uit? H3,.66

Accounts =ayable 5ash =aid balance due on purchase of equipment. Assets 9 ia%i)ities : H-6,666 H-6,666

g+ Accounts >eceivable Advertising >evenue :old advertising during Kanuary+ due by 2ebruary 1!. Assets 9 ia%i)ities :,-,666 <+ Fage and :alary Expense 5ash =aid payroll for second half of month. Assets 9 ia%i)ities H*.,666 i+

5ommissions Expense 5ommissions =ayable 5ommissions earned by salespeople during Kanuary+ to be paid on 2ebruary !. Assets 9 ia%i)ities : :3,.66

313-

234A453A, A556748349 :6,78364: "A47A,

O 3,-,.,0

PROB E! 31*, IO3R"A E"TRIES RECOR#E# #IRECT 7 I" T ACCO3"TS FAPPE"#IXG

*+ 8 Accounts FaG FcG Cas< 200+000 1!0+000 12!+000 10+000 1 +000 #0+000 1!+000 2!+000 22(+000 ?al. *'+000 an$ #0+000 Bui)$ing 110+000 F%G F$G FeG FfG F<G FgG Accounts Recei'a%)e 2#+000

F%G

F%G

F$G

Office E>ui@ment !0+000

FfG

Accounts Pa?a%)e #0+000 #0+000 D0D

F$G ?al.

Commissions Pa?a%)e +!00

FiG

"otes Pa?a%)e 12!+000

FcG

Ca@ita) Stoc; 200+000

FaG

A$'ertising Re'enue 2#+000

FgG

Wage an$ Sa)ar? E(@ense FeG 1 +000 F<G 1!+000 ?al. 2(+000

FiG

Commissions E(@ense +!00

5<A=8E>

=>65E::349 A556748349 3426>"A8364

313.

PROB E! 31*, FConc)u$e$G

,+

ATEI"S A#VERTISI"8 A8E"C7 TRIA BA A"CE IA"3AR7 3*, ,660 5ash Accounts >eceivable ,and ?uilding 6ffice Equipment 5ommissions =ayable 4otes =ayable 5apital :toc@ Advertising >evenue Fage and :alary Expense 5ommissions Expense 8otals #r+ I *'+000 2#+000 #0+000 110+000 !0+000 I Cr+

+!00 12!+000 200+000 2#+000

2(+000 +!00 I !2+!00

I !2+!00

O 3,.,0

PROB E! 31*3 THE #ETECTIO" OF ERRORS I" A TRIA BA A"CE A"# PREPARATIO" OF A CORRECTE# TRIA BA A"CE FAPPE"#IXG

*+ 8he trial balance is out of balance by I220+&#0 J I20(+(#0+ or I11+(00. 8he difference can be accounted for as follows. Amount by which trial balance is out of balance. %ividends account should be a debit balance+ not a credit balance/ removing a credit balance and replacing it with a debit balance will result in a difference in the trial balance totals of twice the I!+000 difference+ or. >emaining difference 4otes =ayable has a credit balance of I'!+ 00+ but the total balance in ?uilding and Equipment is only I' +!00/ this is a difference of. >emaining difference I 11+(00

010+0001 I 1+(00 01+(001 0

8he %ividends error may have simply been the result of posting a debit in the )ournal entry incorrectly as a credit to the ledger account. 6r+ it is possible that %ividends was incorrectly credited in the )ournal entry. 8he transposition error in the acquisition of the building and equipment in exchange for the note may have resulted from posting I2 +!00 to the Equipment account instead of the correct amount of I2!+ 00. 6r+ as was the case with the dividends error+ it is possible that the entry to record the acquisition was incorrectly recorded as a debit to Equipment for I2 +!00.

313/

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*3 FConc)u$e$G

,+

!A CO ! I"C+ REVISE# TRIA BA A"CE IA"3AR7 3*, ,660 5ash Accounts >eceivable ,and ?uilding Equipment 4otes =ayable 5apital :toc@ :ervice >evenue Fage and :alary Expense Advertising Expense 7tilities Expense %ividends 8otals #r+ I *+*(0 (+&#0 (0+000 !0+000 2!+ 00 Cr+

I '!+ 00 *0+000 !0+ #0 2 +'00 #+&00 (+#20 !+000 I 21!+&#0

I 21!+&#0

O 3,.,/,0

PROB E! 31*- IO3R"A E"TRIES, TRIA BA A"CE, A"# FI"A"CIA STATE!E"TS FAPPE"#IXG

*+ Kournal entries. Kan. 2 5ash 5apital :toc@ 3ssued 100+000 shares of capital stoc@ for cash. Assets 9 ia%i)ities : :*66,666 Farehouse ,and 5ash =urchased warehouse and land for cash. Assets 9 ia%i)ities : :/6,666 :,6,666 H46,666 100+000 100+000 Stoc;<o)$ersB E>uit? :*66,666 &0+000 20+000 (0+000 Stoc;<o)$ersB E>uit?

Kan.

Kan. #

5ash !0+000 4otes =ayable !0+000 :igned threeDyear promissory note at 8hird :tate ?an@. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :.6,666 :.6,666

5<A=8E>

=>65E::349 A556748349 3426>"A8364

3130

PROB E! 31*- FContinue$G

Kan. &

%elivery 8ruc@s 5ash =urchased five new delivery truc@s for cash. Assets 9 ia%i)ities : :-.,666 H-.,666 Accounts >eceivable :ervice >evenue =erformed services during month on account. Assets 9 ia%i)ities : :*.,566 5ash Accounts >eceivable >eceived cash from customers on account. Assets 9 ia%i)ities : :0,-56 H0,-56 9as and 6il Expense Accounts =ayable =urchased gas and oil on account. Assets 9 ia%i)ities : :3,,36

#!+000 #!+000 Stoc;<o)$ersB E>uit?

Kan. 1

1!+*00 1!+*00 Stoc;<o)$ersB E>uit? :*.,566 '+#*0 '+#*0 Stoc;<o)$ersB E>uit?

Kan. 1

Kan. 1

+2 0 +2 0 Stoc;<o)$ersB E>uit? H3,,36

,+

B 3E IA7 #E IVER7 SERVICE TRIA BA A"CE IA"3AR7 3*, ,660 5ash Farehouse ,and %elivery 8ruc@s Accounts >eceivable Accounts =ayable 5apital :toc@ 4otes =ayable :ervice >evenue 9as and 6il Expense 8otals I #r+ 2+#*0 &0+000 20+000 #!+000 (+#10 Cr+

I +2 0 100+000 !0+000 1!+*00 +2 0 I1&*+1 0 I1&*+1 0

3134

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*- FContinue$G

3+

B 3E IA7 #E IVER7 SERVICE I"CO!E STATE!E"T FOR THE !O"TH E"#E# IA"3AR7 3*, ,660 :ervice revenue 9as and oil expense 4et income I 1!+*00 +2 0 I 12+&'0

-+

B 3E IA7 #E IVER7 SERVICE BA A"CE SHEET IA"3AR7 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable 8otal current assets =roperty+ plant+ and equipment. ,and Farehouse %elivery truc@s 8otal property+ plant+ and equipment 8otal assets ia%i)ities an$ Stoc;<o)$ers= E>uit? 5urrent liabilities. Accounts payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersB equity 8otal liabilities and stoc@holdersB equity

2+#*0 (+#10 I #0+*00

I 20+000 &0+000 #!+000 12!+000 I 1&!+*00 I +2 0

!0+000 I ! +2 0 I 100+000 12+&'0 112+&'0 I 1&!+*00

.+ Additional information needed. Ian+ 3C 3s the warehouse newQ <ow large is itQ Fhat volume of business can it supportQ Ian+ -C Fhat is the interest rate on the loanQ Are there any restrictions on the companyBs operations in the debt agreement 0covenants1Q Fere any assets offered as collateralQ

5<A=8E>

=>65E::349 A556748349 3426>"A8364

3135

PROB E! 31*- FConc)u$e$G

Ian+ /C

<ow long are the truc@s expected to lastQ Fill they have any salvage valueQ Fhat volume of business can they supportQ

Ian+ 3*C Fhen will customers pay the remaining balanceQ Fhat is the credit standing of the customersQ Ian+ 3*C 3s there a limit on how much the company chargesQ Fhat if the company cannot pay by the 10thQ O 3,.,/,0
PROB E! 31*. IO3R"A E"TRIES, TRIA BA A"CE, A"# FI"A"CIA STATE!E"TS FAPPE"#IXG

*+ Kournal entries. Kune 2 5ash 5apital :toc@ 3ssued capital stoc@ for cash. Assets 9 ia%i)ities :36,666 0+000 0+000 : Stoc;<o)$ersB E>uit? :36,666 12+000 2+!00 *+!00 Stoc;<o)$ersB E>uit?

Kune !

5omputer 5ash Accounts =ayable =urchased computer with down payment/ balance due in &0 days. Assets 9 ia%i)ities : :*,,666 :5,.66 H,,.66 5ash 4otes =ayable :igned twoDyear promissory note at ban@. Assets 9 ia%i)ities : :,6,666 :,6,666 Accounts >eceivable :ervice >evenue ?illed customers for services rendered in first half of month/ balance due in 10 days. Assets 9 ia%i)ities :*,,3.6

Kune (

20+000 20+000 Stoc;<o)$ersB E>uit? 12+ !0 12+ !0

Kune 1!

Stoc;<o)$ersB E>uit? :*,,3.6

31-6

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*. FContinue$G

Kune 1'

Advertising Expense 5ash =aid for Kune advertising. Assets 9 ia%i)ities H566

*00 *00 : Stoc;<o)$ersB E>uit? H566

Kune 2

5ash 12+ !0 Accounts >eceivable 12+ !0 >eceived amounts due from customers. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :*,,3.6 H*,,3.6 7tility Expense 5ash =aid gas+ electric+ and water bills. Assets 9 ia%i)ities : H,,066 >ent Expense >ent =ayable >eceived bill for Kune rent to be paid by Kuly 10. Assets 9 ia%i)ities : :,,,66 :alaries and Fages Expense 5ash =aid Kune salaries and wages. Assets 9 ia%i)ities H.,/06 2+'00 2+'00 Stoc;<o)$ersB E>uit? H,,066 2+200 2+200 Stoc;<o)$ersB E>uit? H,,,66 !+&'0 !+&'0 : Stoc;<o)$ersB E>uit? H.,/06

Kune 2(

Kune 2*

Kune 0

Kune 0

Accounts >eceivable 1(+#00 :ervice >evenue 1(+#00 ?illed customers for services rendered during the second half of Kune. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :*4,-66 :*4,-66 %ividends 5ash %eclared and paid dividends. Assets 9 ia%i)ities H/,666 &+000 &+000 : Stoc;<o)$ersB E>uit? H/,666

Kune 0

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31-*

PROB E! 31*. FContinue$G

,+

"EVERA"ERROR I"C+ TRIA BA A"CE I3"E 36, ,660 5ash Accounts >eceivable 5omputer Accounts =ayable 4otes =ayable >ent =ayable 5apital :toc@ :ervice >evenue Advertising Expense 7tility Expense >ent Expense :alaries and Fages Expense %ividends 8otals #r+ I##+!(0 1(+#00 12+000 Cr+

I *+!00 20+000 2+200 0+000 0+'!0 *00 2+'00 2+200 !+&'0 &+000 I *2+#!0

I *2+#!0

3+a+

"EVERA"ERROR I"C+ I"CO!E STATE!E"T FOR THE !O"TH E"#E# I3"E 36, ,660 :ervice revenue Expenses. Advertising 7tilities >ent :alaries and wages 4et income I 0+'!0 I *00 2+'00 2+200 !+&'0

11+#'0 I 1*+2(0

31-,

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*. FConc)u$e$G

3+%+

"EVERA"ERROR I"C+ STATE!E"T OF RETAI"E# EAR"I"8S FOR THE !O"TH E"#E# I3"E 36, ,660 ?eginning balance+ Kune 1+ 200' Add. 4et income %educt. %ividends Ending balance+ Kune 0+ 200' I 0 1*+2(0 0&+0001 I 1 +2(0

3+c+

"EVERA"ERROR I"C+ BA A"CE SHEET I3"E 36, ,660 Assets 5urrent assets. 5ash Accounts receivable 8otal current assets =roperty+ plant+ and equipment. 5omputer 8otal assets ia%i)ities an$ Stoc;<o)$ers= E>uit? 5urrent liabilities. Accounts payable >ent payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersB equity 8otal liabilities and stoc@holdersB equity

I ##+!(0 1(+#00 I &2+*(0 12+000 I '#+*(0 I *+!00 2+200

I 11+'00 20+000 I 1+'00

I 0+000 1 +2(0 # +2(0 I '#+*(0

-+

Res+ the outloo@ for the company loo@s relatively appealing. 8he company operated profitably during the month of Kune and was able to generate significant revenues and control its costs. 8he profit margin for the month was in excess of &0O. 3n addition+ it appears to be relatively liquid+ with a current ratio of over ! to 1.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31-3

A O*

TER"ATE PROB

E!S

PROB E! 31*A EVE"TS TO BE RECOR#E# I" ACCO3"TS

*+ E 4ot recorded ,+ E >ecorded. :upplies+ Accounts =ayable 3+ E 4ot recorded -+ E >ecorded. 5ash+ 5omputer :ystem .+ E >ecorded. Accounts >eceivable+ :ervice >evenue /+ E 4ot recorded 0+ E >ecorded. :alaries and Fages Expense+ 5ash 4+ E >ecorded. Accounts =ayable+ 5ash

31-O3

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31,A TRA"SACTIO" A"A 7SIS A"# FI"A"CIA STATE!E"TS

*+ ?eachway Enterprises 8ransactions for the month of Kune 200'. Assets - ia%i)ities : Stoc;<o)$ersB E>uit?
#ate &P1 &P1 ?al. I#+000 &P! &P10 ?al. I +*&! &P1! &P1' &P2# ?al. I#+(*! &P2* &P 0 &P 0 1+000 1+!00 I 1+000 I 1+000 I 1+000 I &+2!0 I &+2!0 I &+2!0 I !0 I !0 I !0 I &+ 00 I &+ 00 J&+2!0 I !0 I #+000 I #+ 0! I #+000 I #+000 J*0 ?al. I!+(*! ?al. I'+ *! ?al. I'+ 0! &P 0 J&+2!0 ?al. I 1+0!! J'0 I &+2!0 I &+2!0 I 2+000 I 2+000 J1+000 I 1+000 I &+2!0 I !0 I &+ 00 I #+000 I2+(*! 1+!00 I#+ *! J*0 I#+ 0! I &+2!0 I !0 I &+ 00 I #+000 I !0 I !0 I &+ 00 I &+ 00 I #+000 I #+000 1+000 ?al. I +(*! ?al. I#+(*! I &+2!0 J ! I &+2!0 I !0 I !0 I &+2!0 !0 I &+ 00 I #+000 I 0 !1 J'0 I 010!1 1+000 I (*! 2+000 I2+(*! I #+000 ?al. I +*&! Accounts Cas< Recei'a%)e I#+000 E>ui@ment Su@@)ies I &+2!0 I &+2!0 Accounts Pa?a%)e I &+2!0 I &+2!0 I #+000 I J ! I 0 !1 Ca@ita) Stoc; I #+000 Retaine$ Earnings

TOTA ASSETSC D4,3..

TOTA IABI ITIES A"# STOCEHO #ERSB E23IT7C D4,3..

,+

BEACHWA7 E"TERPRISES I"CO!E STATE!E"T FOR THE !O"TH E"#E# I3"E 36, ,660 >ental fee revenue Expenses. >egistration fee Advertising :alaries and wages 4et income $I1+000 M I2+000 M I1+!00 I #+!00$ I ! '0 *0

1*! I #+ 0!

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31-.

31-/

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31,A FConc)u$e$G

3+

BEACHWA7 E"TERPRISES BA A"CE SHEET I3"E 36, ,660 Assets 5urrent assets. 5ash Accounts receivable :upplies 8otal current assets =roperty+ plant+ and equipment. Equipment 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity

I 1+0!! 1+000 !0 I 2+10! &+2!0 I (+ !!

I I #+000 #+ 0!

!0

(+ 0! I (+ !!

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31-0

O3 *+

PROB E! 313A TRA"SACTIO" A"A 7SIS A"# FI"A"CIA STATE!E"TS

#7"A!IC SERVICES I"C+ TRA"SACTIO"S FOR THE !O"TH OF !ARCH, ,660

Assets 9
Su@@)ies

ia%i)ities
Accounts Pa?a%)e "otes Pa?a%)e

: Stoc;<o)$ersB E>uit?
Ca@ita) Stoc; Retaine$ Earnings

#ate

Cas<

Accounts Recei'a%)e Com@uter

P2 P' P12

I20+000 '+!00 I !0 I !0 I 2+000 I2+000 I2+000 J!00 I1+!00 I1+!00 I #+000 I1+!00 I1+!00 I 1+!00 I#+000 I#+000 I #+000 I !0 I !0 I !0 I !0 I !0 I !0 I '+!00 I '+!00 I '+!00 I !0 I !0 I !0 I !0 I '+!00 I '+!00 I !0 I !0 I !0 I !0 I '+!00 I '+!00 I !0 I !0 I '+!00 I '+!00 I '+!00

I20+000 I20+000 I20+000 I 2+000 I20+000 I20+000 I20+000 I20+000 I20+000 I20+000 I20+000 I 2+000 J&!0 I 1+ !0 I 1+ !0 1+#00 I 2+'!0 I 2+'!0 J1+&!0 I 1+100 J'00 I #00

?al. I2'+!00 ?al. I2'+!00 P1* ?al. I2'+!00 P20 P22 P2& P2* P 0 P 1 J&!0 !00 1+#00 J#+000 J1+&!0 J'00 ?al. I2&+(!0 ?al. I2'+ !0 ?al. I2(+'!0 ?al. I2#+'!0 ?al. I2 +100 ?al. I22+#00

TOTA ASSETSC D,4,,.6

TOTA IABI ITIES A"# STOCEHO #ERSB E23IT7C D,4,,.6

31-4

234A453A, A556748349 :6,78364: "A47A,

PROB E! 313A FConc)u$e$G

,+

#7"A!IC SERVICES I"C+ I"CO!E STATE!E"T FOR THE !O"TH E"#E# !ARCH 3*, ,660 8ax preparation revenue Expenses. Advertising :alaries and wages 9as+ electricity+ and water 4et income $I2+000 M I1+#00 I +#00$ I &!0 1+&!0 '00 I

+000 #00

3+

#7"A!IC SERVICES I"C+ BA A"CE SHEET !ARCH 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable :upplies 8otal current assets =roperty+ plant+ and equipment. EquipmentHcomputer system 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity

I 22+#00 1+!00 !0 I 2#+2!0 #+000 I 2(+2!0

!0

'+!00 I '+(!0 I 20+000 #00 20+#00 I 2(+2!0

-+

8rade accounts often have a 0Dday collection or payment period. 2or example+ cash should be received from the accounts receivable and cash paid for the accounts payable during the month of April.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31-5

O3 S S S S S S S S S S

PROB E! 31-A TRA"SACTIO"S RECO"STR3CTE# FRO! FI"A"CIA STATE!E"TS

:ales on credit 5ollected cash from customers =urchase of equipment+ furniture+ and land 3ncurrence of salary and wage expense/ I&+000 remains unpaid >eceived deposits from customers 0unearned revenue1 5apital stoc@ issued %ividends paid 0net income for the first month is more than the ending balance in retained earnings1 ?orrowed money on a promissory note 3ncurred rent expense 3ncurred utility expense A TER"ATE !3 TI1CO"CEPT PROB E!S O *,,
PROB E! 31.A I#E"TIFICATIO" OF EVE"TS WITH SO3RCE #OC3!E"TS

a+ 8he chec@ paid for the security deposit and rent as well as a deposit receipt would be generated from this event. 8he deposit receipt would be used to record the amount involved. %+ 8his event would not be recorded. c+ A sales invoice would be used to record the amount of the sale of merchandise to a customer for cash. $+ 8his event would not be recorded. e+ A remittance copy of the bills would be used to record the amount remitted+ the customer name and account number+ and the specific invoices that were paid. f+ :toc@ certificates and chec@s would be generated by this event. 8he chec@ would be used to record the amount of stoc@ purchased.

g+ A loan agreement and other ban@ documents for the receipt of cash would be generated by this event. 8he loan agreement would be used to record the amount of the loan and the various terms such as the due date+ the interest rate+ and any collateral. <+ 8his event would not be recorded.

31.6

234A453A, A556748349 :6,78364: "A47A,

O *,3 *+

PROB E! 31/A TRA"SACTIO" A"A 7SIS

Assets #ate 2P2 ?al. 2P ?al. 2P# ?al. 2P1! ?al. 2P2& ?al. 2P2' ?al. Cas< I J#00 I J#00 J +2 0 I J +& 0 J2+000 I J!+& 0 (+000 I 2+ '0 I I 2+ '0 2+ '0 Accounts Recei'a%)e

Stoc;<o)$ersB 9 ia%i)ities : E>uit? Accounts Wages Retaine$ Pa?a%)e Pa?a%)e Earnings I J#00 I J#00 I J +2 0 I J +2 0 I J#00 I J2+000 I J +2 0 I J#00 I J#00 I J#00 I J#00 I J2+000 I J2+000 1&+(00 I 1#+(00 J +#00 I 11+#00

I J(+000 I J(+000 1&+(00 I (+(00 I (+(00

I J +2 0 I J +2 0 +#00 I 1'0

,+ 2eb. 2. 2eb. . 2eb. #.

Kanuary expense Kanuary expense 4ot an expense

2eb. 2'. 2ebruary expense

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31.*

O *,3 *+

PROB E! 310A TRA"SACTIO" A"A 7SIS A"# A BA A"CE SHEET

ERITTERSBE8O"E I"C+ TRA"SACTIO"S FOR THE !O"TH OF I3 7 ,660

Assets 9
E>ui@ment

ia%i)ities
Accounts Pa?a%)e 3nearne$ Ser'ice Re'enue

: Stoc;<o)$ersB E>uit?
Ca@ita) Stoc; Retaine$ Earnings

#ate

Cas<

Accounts Recei'a%)e

Pre@ai$ Rent

'P2 'P 'P! 'P1' 'P2( 'P 0 'P 0 'P 1

I1(+000 J1+000

I1(+000 IJ1+000 I1(+000 I1(+000 I1(+000 I1(+000 I 1+000 I1+000 I '+!00 I'+!00 I'+!00 I '+!00 I1+000 I1+000 I 1+000 I1(+000 I1(+000 I1(+000 I1 +000 I1 +000 I &00 I1 +000 I &00 TOTA I1(+000 I #+ !0 IABI ITIES A"# STOCEHO #ERSB I1(+000 I1(+000 I1(+000 I1 +000 I1(+000 I1 +000 I1 +000 I1 +000 I1(+000 I1(+000 IJ1+000 J200 IJ1+200 J#!0 IJ1+&!0 1!+!00 I1 +(!0 J*+!00 I #+ !0 IJ1+000

?al. I1'+000 J!+000 J200 J1+#!0 (+000 J*+!00 &00 TOTA ASSETSC D3.,5.6 E23IT7C D3.,5.6 ?al. I12+000 ?al. I11+(00 ?al. I10+ !0 ?al. I1(+ !0 ?al. I (+(!0 ?al. I *+#!0

31.,

234A453A, A556748349 :6,78364: "A47A,

PROB E! 310A FConc)u$e$G

,+

ERITTERSBE8O"E I"C+ BA A"CE SHEET I3 7 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable =repaid rent 8otal current assets =roperty+ plant+ and equipment. Equipment 8otal assets ia%i)ities an$ Stoc;<o)$ers= E>uit? 5urrent liabilities. Accounts payable 7nearned service revenue 8otal current liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersB equity 8otal liabilities and stoc@holdersB equity

I *+#!0$ '+!00 1+000 I 1'+*!0 1(+000 I !+*!0 I 1 +000 &00 I 1 +&00 I 1(+000 #+ !0$$ 22+ !0 I !+*!0

$I1(+000 J I1+000 J I!+000 J I200 J I1+#!0 M I(+000 J I*+!00 M I&00 $$JI1+000 J I200 J I#!0 M I1!+!00 J I*+!00 3n the month of August+ the company should have a cash inflow of I'+!00 from customers for services provided during Kuly. Also+ the company should have a cash outflow of I1 +000 to pay the balance due on the purchase of the equipment. 8his cash flow information is useful to investors and creditors because it helps them understand the prospects for the company in the future. 8his type of information is particularly useful to ban@ers. O 3,.
PROB E! 314A ACCO3"TS 3SE# TO RECOR# TRA"SACTIO"S FAPPE"#IXG

a+ %+ c+ $+ e+ f.

Accounts Accounts #e%ite$ Cre$ite$ 1 10 ! * & 10 1 12 1 1 4 7

g <+ i+ &+ ;+

#e%ite$ ' 1# ' 1!

Cre$ite$ 1 ' 1 1 1

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31.3

O 3,-,.

PROB E! 315A TRA"SACTIO" A"A 7SIS A"# IO3R"A E"TRIES RECOR#E# #IRECT 7 I" T1ACCO3"TS FAPPE"#IXG

*+

>apid 5ity >oller >in@ transactions for the month of 6ctober 200'. Assets 9 Bui)$ing I '!+000 I '!+000 I I '!+000 I '!+000 I I '!+000 I '!+000 I '!+000 I'!+000 I '!+000 I '!+000 I '!+000 I '!+000 E>ui@ment ia%i)ities : Accounts "otes Pa?a%)e Pa?a%)e I (1+000 I (1+000 2!+000 I I 2!+000 +!00 I 2(+!00 '!+000 I I 2(+!00 I 2(+!00 I 2(+!00 I 2(+!00 I 2(+!00 I 2(+!00 I 2(+!00 I2(+!00 20+000 I 20+000 I 20+000 2+!00 2(+!00 I I22+!00 I22+!00 I22+!00 I 22+!00 I22+!00 I 22+!00 I 22+!00 I22+!00 TOTA I (1+000 I (1+000 22+!00 I I(1+000 I(1+000 I(1+000 I(1+000 I(1+000 I(1+000 I(1+000 I(1+000 Stoc;<o)$ersB E>uit? Ca@ita) Retaine$ Stoc; Earnings I &&+000 I &&+000 I &&+000 I &&+000 (1+000 I I &&+000 I&&+000 I&&+000 I &&+000 I&&+000 I&&+000 I&&+000 I&&+000 &&+000 I #00 '!0 I 1+1!0 '!0 I 1+*00 I 1+*00 !00 1+200 I +&00 J'!0 I 2+(!0 J1+2'! I 1+!'! J2+2!0 I 0&'!1 '00 1+ 00 I 1+ 2!

#ate 10P1 10P2 ?al. 10P ?al. 10P* ?al. 10P12 ?al. 10P1 ?al. 10P1' ?al. 10P2 ?al. 10P2# ?al. 10P2& ?al. 10P2' ?al. 10P 0 ?al. 10P 1 ?al. D*06,4,.

Accounts Concession Cas< Recei'a%)e Su@@)ies I &&+000 J*+000 I !'+000 J!+000 I !2+000 J +!00 I #(+!00 I2+!00 I #(+!00 I 2+!00 1+1!0 I#*+&!0 I#*+&!0 '! I !0+02! 1+'00 I!1+'2! J'!0 I!0+*'! J1+2'! I#*+'00 J2+2!0 I#'+#!0 2+000 I#*+#!0 I'!0 I '!0 J '! I '! I '! I '! I '! I '! I '! I 2+!00 I 2+!00 I 2+!00 I 2+!00 I 2+!00 I 2+!00 I 2+!00 I 2+!00

an$ I1!+000 I1!+000 LLLLLLL I1!+000 LLLL LL I1!+000 I1!+000 I1!+000 I1!+000 I1!+000 I1!+000 I1!+000 I1!+000 I1!+000 I 1!+000

TOTA ASSETSC D*06,4,.

IABI ITIES A"# STOCEHO #ERSB E23IT7C

31.-

234A453A, A556748349 :6,78364: "A47A,

PROB E! 315A FConc)u$e$G

,+ 010P11 010P1 1 010P2 1 010P2#1 010P 11

Cas< &&+000 1+1!0 '! 1+'00 2+000 '1+22!

*+000 010P21 !+000 010P 1 +!00 010P*1 '!0 010P2&1 1+2'! 010P2'1 2+2!0 010P 01

010P1'1

Accounts Recei'a%)e '!0 '! 010P2 1

21+''!

?al.

'!

?al.

#*+#!0 an$ 1!+000

Concession Su@@)ies 010P121 2+!00

010P21

010P21

Bui)$ing '!+000

010P 1 010P*1 ?al.

E>ui@ment 2!+000 +!00 2(+!00 "otes Pa?a%)e (1+000

Accounts Pa?a%)e 20+000 010P 1 2+!00 010P121 22+!00 Ca@ita) Stoc; &&+000 ?al.

010P21

010P11

010P2&1 010P2'1 010P 01

Retaine$ Earnings '!0 #00 1+2'! '!0 2+2!0 '!0 !00 1+200 '00 1+ 00 #+2'! !+&00 1+ 2!

010P1 1 010P1 1 010P1'1 010P2#1 010P2#1 010P 11 010P 11 ?al.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31..

O -,0 *+

PROB E! 31*6A TRIA BA A"CE A"# FI"A"CIA STATE!E"TS FAPPE"#IXG

RAPI# CIT7 RO ER RI"E TRIA BA A"CE OCTOBER 3*, ,660 5ash Accounts >eceivable 5oncession :upplies ,and ?uilding Equipment Accounts =ayable 4otes =ayable 5apital :toc@ >etained Earnings 8otals #r+ I #*+#!0 '! 2+!00 1!+000 '!+000 2(+!00 Cr+

I 1'0+(2!

I 22+!00 (1+000 &&+000 1+ 2! I 1'0+(2!

,+

RAPI# CIT7 RO ER RI"E I"CO!E STATE!E"T FOR THE !O"TH E"#E# OCTOBER 3*, ,660 >evenues. 8ic@et sales 5oncession sales >ental revenue Expenses. 7tilities :alaries and wages 4et income $I#00 M I!00 M I'00 $$I'!0 M I1+200 M I1+ 00 I 1+&00$ +2!0$$ '!0 I 1+2'! 2+2!0

I !+&00 +!2! I 2+0'!

3+

RAPI# CIT7 RO ER RI"E STATE!E"T OF RETAI"E# EAR"I"8S FOR THE !O"TH E"#E# OCTOBER 3*, ,660 ?eginning balance+ 6ctober 1+ 200' Add. 4et income %educt. %ividends Ending balance+ 6ctober 1+ 200' 0 2+0'! 0'!01 I 1+ 2! I

31./

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*6A FConc)u$e$G

-+

RAPI# CIT7 RO ER RI"E BA A"CE SHEET OCTOBER 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable 5oncession supplies 8otal current assets =roperty+ plant+ and equipment. ,and ?uilding Equipment 8otal property+ plant+ and equipment 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable ,ongDterm debt. 4otes payable 8otal liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity

I #*+#!0 '! 2+!00 I !2+ 2! I 1!+000 '!+000 2(+!00 11(+!00 I 1'0+(2!

I 22+!00 (1+000 I 10 +!00 I &&+000 1+ 2! &'+ 2! I 1'0+(2!

O 3,.,/

PROB E! 31**A IO3R"A E"TRIES FAPPE"#IXG

a+ 5ash 5apital :toc@ 3ssued 10+000 shares of capital stoc@ for cash. Assets 9 ia%i)ities : :*.6,666 %+ >ent Expense 5ash =aid 2ebruary rent. Assets H-66

1!0+000 1!0+000 Stoc;<o)$ersB E>uit? :*.6,666 #00 #00

ia%i)ities

Stoc;<o)$ersB E>uit? H-66

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31.0

PROB E! 31**A FConc)u$e$G

c+ 5ash 4otes =ayable :igned fiveDyear promissory note. Assets 9 ia%i)ities :*66,666 :*66,666

100+000 100+000 : Stoc;<o)$ersB E>uit? !+000 !+000 Stoc;<o)$ersB E>uit? *!0 *!0 : Stoc;<o)$ersB E>uit?

$+ 5ash 7nearned :ervice >evenue >eceived cash for services to be performed over the next two months. Assets 9 ia%i)ities : :.,666 :.,666 e+ 5omputer :oftware 5ash =urchased software to be used over next two years. Assets 9 ia%i)ities :5.6 H5.6 f+ Accounts >eceivable 5onsulting >evenue ?illed customers for wor@ performed during month. Assets 9 ia%i)ities :*,,.66

12+!00 12+!00 : Stoc;<o)$ersB E>uit? :*,,.66 +000 +000 : Stoc;<o)$ersB E>uit? H3,666 100 100 : Stoc;<o)$ersB E>uit? H*66

g+ :alaries and Fages Expense 5ash =aid office personnel for wor@ performed during month. Assets 9 ia%i)ities H3,666 <+ 7tilities Expense Accounts =ayable >eceived utility bill to be paid within 10 days. Assets 9 ia%i)ities :*66

31.4

234A453A, A556748349 :6,78364: "A47A,

O 3,-,.,0

PROB E! 31*,A IO3R"A E"TRIES RECOR#E# #IRECT 7 I" T ACCO3"TS FAPPE"#IXG

*+ 8 Accounts FaG FcG F$G Cas< 1!0+000 #00 100+000 *!0 !+000 +000 2!!+000 ?al. 2!0+&!0 #+ !0 F%G FeG FgG FfG Accounts Recei'a%)e 12+!00

FeG

Com@uter SoftKare *!0

Accounts Pa?a%)e 100

F<G

3nearne$ Ser'ice Re'enue !+000

F$G

"otes Pa?a%)e 100+000

FcG

Ca@ita) Stoc; 1!0+000

FaG

Consu)ting Re'enue 12+!00

FfG

Sa)aries an$ Wages E(@ense FgG +000

F%G

Rent E(@ense #00

F<G

3ti)ities E(@ense 100

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31.5

PROB E! 31*,A FConc)u$e$G

,+

CAST E CO"S3 TI"8 A8E"C7 TRIA BA A"CE FEBR3AR7 ,4, ,660 5ash Accounts >eceivable 5omputer :oftware Accounts =ayable 7nearned :ervice >evenue 4otes =ayable 5apital :toc@ 5onsulting >evenue :alaries and Fages Expense >ent Expense 7tilities Expense 8otals #r+ I 2!0+&!0 12+!00 *!0 I Cr+

100 !+000 100+000 1!0+000 12+!00

+000 #00 100 I 2&'+&00

I 2&'+&00

O 3,-,.,0

PROB E! 31*3A E"TRIES PREPARE# FRO! A TRIA BA A"CE A"# PROOF OF THE CASH BA A"CE FAPPE"#IXG

*+ 5ash M All other debits 5ash M I122+(00

8otal debits I2#0+!00$ I11'+'00

5ash - I2#0+!00 J I122+(00 -

$8otal debits must equal total credits+ which total I2#0+!00. ,+ All transactions involving cash during the month. Cas< FaG 120+000 1#+&00 FcG F%G 0+000 12+!00 F$G !+200 FeG 1!0+000 ?al.11'+'00 Explanations. FaG 3ssuance of capital stoc@ for cash F%G 5ash collections from service revenue. 8otal revenue 4ot yet collected+ accounts receivable 5ash received I &0+!00 0+!00 I 0+000 2+ 00

31/6

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*3A FConc)u$e$G

FcG :alaries and wages paid. 8otal salary and wage expense 4ot yet paid+ salaries and wages payable 5ash paid

I 2#+&00 10+000 I 1#+&00

F$G Advertising paidHmust have been the amount paid because there is no accounts payable or advertising payable. FeG >ent paidHmust have been the amount paid because there is no accounts payable or rent payable. O 3,.,/
PROB E! 31*-A IO3R"A E"TRIES FAPPE"#IXG

*+ Kournal entries. 2eb. 2 Fages =ayable 5ash =aid wages owed employees. Assets 9 ia%i)ities H-66 H-66 #00 #00 : Stoc;<o)$ersB E>uit?

2eb.

Accounts =ayable +2 0 5ash +2 0 =aid for oil and gas billed in Kanuary. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? H3,,36 H3,,36 %ividends 5ash %eclared and paid cash dividends. Assets 9 ia%i)ities : H,,666 5ash Accounts >eceivable >eceived cash on open accounts. Assets 9 ia%i)ities : :4,666 H4,666 Accounts >eceivable :ervice >evenue =rovided services on account during 2ebruary. Assets 9 ia%i)ities :*/,466 2+000 2+000 Stoc;<o)$ersB E>uit? H,,666 (+000 (+000 Stoc;<o)$ersB E>uit?

2eb. #

2eb. 1!

2eb. 2&

1&+(00 1&+(00 : Stoc;<o)$ersB E>uit? :*/,466

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31/*

PROB E! 31*-A FConc)u$e$G

2eb. 2'

9as and 6il Expense +#00 Accounts =ayable +#00 >eceived gas and oil bill for 2ebruary. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :3,-66 H3,-66 Kanuary expense Kanuary expense 4ot an expense

,+ 2eb. 2. 2eb. . 2eb. #.

2eb. 2'. 2ebruary expense O 3,.,/

PROB E! 31*.A IO3R"A E"TRIES A"# A BA A"CE SHEET FAPPE"#IXG

*+ Kournal entries. Kuly 2 5ash 5apital :toc@ 3ssued capital stoc@ to six owners in exchange for I +000 each. Assets 9 ia%i)ities : :*4,666 >ent Expense 5ash =aid Kuly rent. Assets 9 H*,666 1(+000 1(+000 Stoc;<o)$ersB E>uit? :*4,666 1+000 1+000 ia%i)ities : Stoc;<o)$ersB E>uit? H*,666

Kuly

Kuly !

Equipment 1(+000 5ash !+000 Accounts =ayable 1 +000 =urchased equipment with down payment/ balance due in 0 days. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :*4,666 :*3,666 H.,666 Advertising Expense 5ash =aid for doorDtoDdoor advertising. Assets 9 ia%i)ities : H,66 200 200 Stoc;<o)$ersB E>uit? H,66

Kuly 1'

31/,

234A453A, A556748349 :6,78364: "A47A,

PROB E! 31*.A FContinue$G

Kuly 2(

=repaid >ent 7tilities Expense 5ash =aid August rent and Kuly utilities. Assets 9 ia%i)ities : :*,666 H*,-.6

1+000 #!0 1+#!0 Stoc;<o)$ersB E>uit? H-.6

Kuly 0

5ash (+000 Accounts >eceivable '+!00 :ervice >evenue 1!+!00 >ecord cash received for Kuly services and sales on account for Kuly+ due in 0 days. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :4,666 :*.,.66 :0,.66 5ommissions Expense 5ash =aid Kuly commissions expense. Assets 9 ia%i)ities : H5,.66 *+!00 *+!00 Stoc;<o)$ersB E>uit? H5,.66

Kuly 0

Kuly 1

5ash &00 7nearned :ervice >evenue &00 >eceived cash from client for services to be performed over next two months. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? :/66 :/66

PROB E! 31*.A FConc)u$e$G

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31/3

,+

ERITTERSBE8O"E I"C+ BA A"CE SHEET I3 7 3*, ,660 Assets 5urrent assets. 5ash Accounts receivable =repaid rent 8otal current assets =roperty+ plant+ and equipment. Equipment 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable 7nearned service revenue 8otal current liabilities 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity

I *+#!0$ '+!00 1+000 I 1'+*!0 1(+000 I !+*!0

I 1 +000 &00 I 1 +&00 I 1(+000 #+ !0$$ 22+ !0 I !+*!0

$I1(+000 J I1+000 J I!+000 J I200 J I1+#!0 M I(+000 J I*+!00 M I&00 $$JI1+000 J I200 J I#!0 M I1!+!00 J I*+!00 3n the month of August+ the company should have a cash inflow of I'+!00 from customers for services provided during Kuly. Also+ the company should have a cash outflow of I1 +000 to pay the balance due on the purchase of the equipment. 8his cash flow information is useful to investors and creditors because it helps them understand the prospects for the company in the future. 8his type of information is particularly useful to ban@ers.

31/-

234A453A, A556748349 :6,78364: "A47A,

#ECISIO" CASES REA#I"8 A"# I"TERPRETI"8 FI"A"CIA STATE!E"TS O#ECISIO" CASE 31* CO!PARI"8 TWO CO!PA"IES I" THE SA!E I"#3STR7C FI"ISH I"E A"# FOOT OCEER

*+

8he largest expense for each company in the most recent year is C5ost of sales.E 8he dollar amount of 2inish ,ineAs cost of sales for the year ended 2ebruary 2!+ 200&+ is I(*#+'2#+000. 2oot ,oc@erAs cost of sales for the year ended Kanuary 2(+ 200&+ is I +*##+000+000. 3t is logical that cost of sales is the largest expense for each of these companies because they are merchandisers. 8hat is+ they purchase products for resale to customers and cost of sales represents the cost of those products sold during the current period. 8he ratio of selling+ general and administrative expenses to sales for each company is as follows. 7ear En$e$ ,L,.L6/ ,L,/L6. Fin t<ousan$sG I 1 +(* I2'1+*01 I1+ 0&+0#! 2#.0O 7ear En$e$ *L,4L6/ *L,5L6. Fin mi))ionsG I1+12* I1+0(( I!+&! 20.0O I!+ !! 20. O I1+1&&+'&' 2 . O

,+

Finis< ineC :elling+ general and administrative expenses %ivided by. 4et sales Equals Foot oc;erC

:elling+ general and administrative expenses %ivided by. :ales Equals

2inish ,ineAs ratio increased slightly during the most recent year+ and 2oot ,oc@erAs ratio decreased slightly. 2oot ,oc@er has the lower ratio in each of the two most recent years.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31/.

#ECISIO" CASE 31* FConc)u$e$G

3+

2inish ,ine reports income tax expense in each of the two most recent years of I &+ (0+000 and I &+'&0+000. 2oot ,oc@erAs income tax expense is I1#2+000+000 and I11*+000+000. 8he ratio of income tax expense to income before taxes for each company is as follows. 7ear En$e$ ,L,.L6/ ,L,/L6. Fin t<ousan$sG I &+ (0 I &+'&0 I*&+*1 '.!O 7ear En$e$ *L,4L6/ *L,5L6. Fin mi))ionsG I1#2 I11* I#0! !.1O I '# 1.(O I*(+02 '.!O

Finis< ineC

3ncome tax expense %ivided by. 3ncome before income taxes Equals Foot oc;erC

3ncome tax expense %ivided by. 3ncome from continuing operations before income taxes Equals

Fhile 2inish ,ineAs ratio of income tax expense to income before income taxes did not change between years+ 2oot ,oc@er experienced an increase in this ratio from one year to the next. 2inish ,ine has a higher ratio than 2oot ,oc@er for both years. 8his tells the reader that 2inish ,ine has incurred more income tax expense relative to its income before income taxes than has 2oot ,oc@er.

31//

234A453A, A556748349 :6,78364: "A47A,

O3 *+

#ECISIO" CASE 31, REA#I"8 A"# I"TERPRETI"8 FOOT OCEERBS STATE!E"T OF CASH F OWS

2or the year ended Kanuary 2(+ 200&+ 2oot ,oc@er spent I1!!+000+000 on purchases of property and equipment. 8he effect on the accounting equation is. Assets :*..,666,666 *..,666,666 9 ia%i)ities : Stoc;<o)$ersB E>uit?

,+

2or the year ended Kanuary 2(+ 200&+ 2oot ,oc@er paid I#*+000+000 in dividends. 8he effect on the accounting equation is. Assets -5,666,666 9 ia%i)ities : Stoc;<o)$ersB E>uit? -5,666,666

O *,3

#ECISIO" CASE 313 REA#I"8 A"# I"TERPRETI"8 SO3THWEST AIR I"ESB BA A"CE SHEET

*+ :outhwest Airlines regularly sells tic@ets in advance of when customers fly. At the time of a sale+ :outhwest records a liability. Air 8raffic ,iability. 8his is an external event because it involves someone outside the entity. ,+ 8he effect on the accounting equation from an advance sale is. Assets 9 ia%i)ities : Stoc;<o)$ersB E>uit? Increase Increase 3+ 8he effect on the accounting equation from the purchase by a customer of a I!00 tic@et is. Assets :.66 9 ia%i)ities :.66 : Stoc;<o)$ersB E>uit?

-+ 8he liability is reduced when customers use their tic@ets. At this point+ :outhwest Airlines will reduce the liability account+ Air 8raffic ,iability+ and increase a revenue account. 8his is an external event.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31/0

!AEI"8 FI"A"CIA #ECISIO"S O ,,3 *+

#ECISIO" CASE 31- CASH F OW VERS3S "ET I"CO!E

7O3"8 PROPERTIES I"CO!E STATE!E"T FOR THE !O"TH OF IA"3AR7 5ommission revenue Expenses. 5ommissions 7tilities :alaries and wages >ent 9as and oil 4et income $I&00+000 T !O $$I#00+000 T #O I 0+000$ I 1&+000$$ !00 2+200 1+200 100

20+000 I 10+000

,+

7O3"8 PROPERTIES STATE!E"T OF CASH F OWS FOR THE !O"TH OF IA"3AR7 5ash flows from operating activities. 5ash collected in commissions 5ash paid for. 5ommissions 7tilities :alaries and wages >ent 9as and oil 4et cash provided by operating activities 5ash flows from investing activities. =urchase of office equipment %own payment on automobile 4et cash used by investing activities 5ash flows from financing activities. 5ash contributed by owner 4et increase in cash I 22+000 I 1&+000 !00 2+200 1+200 100 I 02+0001 0 +0001 0!+0001 20+000 I 1'+000

20+000 I 2+000

31/4

234A453A, A556748349 :6,78364: "A47A,

#ECISIO" CASE 31- FConc)u$e$G

3+ 86. 2>6". %A8E.

:helia Roung :tudentAs name Kanuary 1

:7?KE58. 2irst monthBs results As you requested+ 3 reviewed the results of your operations for the first month of business. 2ortunately+ your concerns about being Cin the holeE are really not )ustified. Rou did in fact have a good first month of sales and have every reason to be encouraged about the future. 3 have enclosed copies of an income statement and a statement of cash flows for Kanuary+ which should significantly alleviate any concerns you may have. 2irst+ KanuaryAs net income of I10+000 is quite favorable+ especially when compared with the monthAs sales of I 0+000. Rou have been successful so far in containing costs while running a viable operation. :econd+ the statement of cash flows provides the specific explanations as to why the I20+000 in cash that you started with is now down to I1'+000. 6ne ma)or reason is that even though your commissions revenue was I 0+000+ you still have I(+000 to collect from these sales. Rou also had fairly significant cash drains up front for down payments on the office equipment and the car. Fithout these expenditures+ your cash balance would have been I!+000 higher. Rou should @eep in mind that the remaining balance on the office equipment of I +000 will be due on 2ebruary 1!. 8he remainder of I12+000 is due on the car in one year from the date of the note. 3 hope 3 have been able to alleviate your concerns about your new business. =lease let me @now if 3 can be of any further assistance. -+ Assets are essentially unexpired costs and represent future benefits. 6nce those benefits have been used up+ the costs become expired and the asset is no longer of any value. 3n accounting+ the periodic process of recognizing the expiration of benefits from tangible longDterm assets+ such as office equipment and automobiles+ is called depreciation. %epreciation is recognized over the life of these assets as an expense on the income statement. 8he process of recognizing depreciation will be examined in detail in later chapters. O *,3,#ECISIO" CASE 31. OA" RE23EST

*+ 3t appears that :imon too@ the I20+000 cash he originally contributed to the business and used it to buy mowing equipment and a truc@. 8he effect on the accounting equation would be. Assets :.,666 :*.,666 H,6,666 9 ia%i)ities : Stoc;<o)$ersB E>uit?

5<A=8E>

=>65E::349 A556748349 3426>"A8364

31/5

#ECISIO" CASE 31. FContinue$G

,+

FRASER A"#SCAPI"8 I"CO!E STATE!E"T FOR THE SIX !O"THS E"#E# SEPTE!BER 36, ,660 >evenues. ,andscaping ,awn care Expenses. 9as and oil 3nsurance >ent :alaries 4et income I +#00 2#+000

I !'+#00

I 1!+'00 2+!00 &+000 22+000

#&+200 I 11+200

3+ ?oth the mowing equipment and the truc@ will benefit 2raserAs business for several years+ and he should attempt to allocate their cost over their estimated useful lives. <e has overstated his net income by ignoring depreciation on the two longDterm assets. %epreciation is an expense that should be recognized over the lives of the longDterm assets. -+ FRASER A"#SCAPI"8 BA A"CE SHEET SEPTE!BER 36, ,660 Assets 5urrent assets. 5ash Accounts receivable 8otal current assets =roperty+ plant+ and equipment. "owing equipment 8ruc@ 8otal property+ plant+ and equipment 8otal assets ia%i)ities an$ Stoc;<o)$ersB E>uit? 5urrent liabilities. Accounts payable 5apital stoc@ >etained earnings 8otal stoc@holdersA equity 8otal liabilities and stoc@holdersA equity I 1+200 2 +000 I 2#+200 I !+000 1!+000 20+000 I ##+200

I 1 +000 I 20+000 11+200 1+200$ I ##+200

$4et income. I11+200 M 6wnersA investments. I20+000. 8he two items of most concern on the balance sheet are the large Accounts >eceivable and Accounts =ayable. 6ver #0O of 2raserAs revenues remain uncollected at the end of the season. I2 +000 of accounts receivable on total revenues of I!'+#00. 3f a significant portion of this amount becomes uncollectible+ 2raser may experience trouble in paying his open accounts.

3106

234A453A, A556748349 :6,78364: "A47A,

#ECISIO" CASE 31. FConc)u$e$G

.+ "emorandum to the request for a loan. 86. 2>6". %A8E. :imon 2raser :tudentAs name 6ctober 1!+ 200'

:7?KE58. ,oan request 5ongratulations on a very successful first year in your new business. 3n con)unction with the business+ 3 have reviewed your recent request for a I20+000 loan to expand your fleet of truc@s and mowing equipment. Rour income statement for the first year shows a profitable operation. 3 am concerned+ however+ that because you did not recognize depreciation on the longDterm assets+ the income reported of I11+200 may overstate the actual profitability of your business. 3f we were conservative and estimated a fiveDyear life for each of these assets+ depreciation would amount to a total of I#+000 for the year. 8he balance sheet also presents some concerns to me. 2irst+ #0O of your accounts receivable remains uncollected at the end of the season. ?efore extending a loan+ 3 would need to feel assured that a very high percentage of this amount will be realized in the near future. :econd+ you have a sizable amount of accounts payable outstanding at the present time. 9iven the small cash balance of I1+200+ your ability to repay the creditors is very directly tied to whether you will be able to collect the amounts due from your customers. 9iven my concerns regarding the large balances in both accounts receivable and accounts payable+ 3 will not be able to approve your request for a loan at this time. 3 would be happy to meet with you to discuss further your request and specifically to review your plans for collection of your open accounts. ETHICA #ECISIO" !AEI"8 O *,3
#ECISIO" CASE 31/ REVE"3E RECO8"ITIO"

*+ 4o+ the boo@@eeper did not account for the clientBs deposit correctly. ?ecause the amount received from the client is a deposit for wor@ to be done next year+ it represents a liability at the end of the year rather than revenue. ,+ As controller for the firm+ you are responsible for the accuracy and fairness of the financial statements. Rou do have a moral and ethical responsibility to correct the boo@s+ even though in so doing the income for the year will be reduced. A reduction in the reported income will affect your yearDend bonus+ but you have a responsibility on your part to the users of the financial statements that supersedes any concerns over your personal financial situation.

5<A=8E>

=>65E::349 A556748349 3426>"A8364

310*

O 3,.,/

#ECISIO" CASE 310 #E A7 I" THE POSTI"8 OF A IO3R"A E"TR7 FAPPE"#IXG

*+ Entries entered into the )ournal but not posted to the ledger accounts will not be reflected in the financial statements. 2ailure to post the expensePcash disbursement entry will mean that cash will be higher on the trial balance prepared by the controller+ and expenses will be lower. ?y ignoring a total of I'&+!00 in various expenses+ net income will be increased by the same amount. ,+ 8he controller is not correct in saying that the omission of the expense entry Cwill not hurt anyone.E 2irst+ there is the basic issue. whether the company should rightfully be required to pay bonuses on a profit level that was not attained. :econd+ there is the related issue. the effect of this deceptive practice on various constituencies of the company. Fhat about the stoc@holdersQ 8hey have entrusted responsibility for managing the business in a fair and ethical manner to the officers of the corporation. 8his particular practice would be a serious violation of this trust. 2inally+ any number of outside users of the financial statements could be misled by this practice. 2or example+ a ban@er relies on the income statement of a company to provide a clear and accurate picture of the results of operations. 8he failure to accurately reflect the expenses of the period results in information that is not free from bias and is certainly misleading. 3+ 8he assistant controller has a definite moral and ethical responsibility to confront the controller about the suggestion. A direct confrontation in this particular case may be warranted. 8he assistant controller should point out that this practice not only violates accounting principles but also is a very serious violation of the trust shown in both individuals by the stoc@holders. 8he assistant controller should explain why this practice is not acceptable. 3f the situation becomes confrontational+ and the controller orders the assistant not to ma@e the entry+ the assistant has a responsibility to tal@ to the controllerBs boss about the problem. 8his situation does present the assistant controller with an ethical dilemma since that person understands that the request by the controller would result in information that is not acceptable practice and is not free from bias.

310,

234A453A, A556748349 :6,78364: "A47A,

REA WOR # PRACTICE 3+* 8he purchase of furniture and fixtures is an external event for 2oot ,oc@er. 8he recording of depreciation on the assets is an internal event. REA WOR # PRACTICE 3+, 2inish ,ines has five current asset accounts on its balance sheet. "erchandise inventories+ net in the amount of I2&(+!*0+000 is the largest of these accounts. 2oot ,oc@er reports four current assets+ and the largest of them is also merchandise inventories. 8he balance in this account is I1+2!#+000+000. REA WOR # PRACTICE ,3+3 8he )ournal entry to record the sale of a pair of running shoes for I100 cash would be. 5ash and 5ash Equivalents :ales :old running shoes for cash. Assets :*66 9 ia%i)ities : 100 100 Stoc;<o)$ersB E>uit? :*66