Management Accounting (GMP, 2019-20)

Mechanics & Principles of Recording Financial Transactions

Exercise 1: Applying the Basic Concepts

Match each of the following statements with the appropriate accounting concept. Some concepts may be used more
than once, while others may not be used at all. Use the notations shown to indicate the appropriate accounting
concept.

Accounting Concept Notation

Accounting period concept A
Adequate disclosure concept D
Entity concept B
Historical Cost concept C
Going concern concept G
Matching concept M
Objectivity concept O
Unit of measure concept U
Prudence concept P
Fair Value concept F
Materiality concept Ma

Statements
1. Assume that a business will continue forever.
2. Material litigation involving the corporation is described in a footnote.
3. Monthly utilities costs are reported as expenses along with the monthly revenues.
4. Personal transactions of owners are kept separate from the business.
5. This concept supports relying on an independent actuary (statistician), rather than the chief operating officer of
the corporation, to estimate a pension liability.
6. Changes in the use of accounting methods from one period to the next are described in the notes to the financial
statements.
7. Land worth $800,000 is reported at its original purchase price of $220,000.
8. This concept justifies recording only transactions that are expressed in dollars.
9. If this concept was ignored, the confidence of users in the financial statements could not be maintained.
10. The changes in financial condition are reported at the end of the month.
11. Hansell Company recognizes revenue at the end of the production cycle but before the sale. The price of the
product, as well as the amount that can be sold, is not certain.
12. Falk Company is in its fifth year of operation and has yet to issue financial statements.
13. Tavarez, Inc. Is carrying inventory at its current fair value of $100,000. Inventory had an original cost of
$110,000.
14. Forgetta Hospital Supply Corporation reports only current assets and current liabilities on its balance sheet.
Property, plant, and equipment and bonds payable are reported as current assets and current liabilities, respectively.
Liquidation of the company is unlikely.
15. Kile Company has inventory on hand that cost $400,000. Kile reports inventory on its balance sheet at its
current fair value of $425,000.
16. Kim Farris, president of Classic Music Company, bought a computer for her personal use. She paid for the
computer by using company funds and debited the "Computers" account. 
17. The president of Fresh Horses, Inc. used his expense account to purchase a new car solely for personal use.
18. Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling
price less estimated selling costs.
19. ABC Company is being sued for $500,000 by a customer who claims damages for personal injury apparently
caused by a defective product. Company attorneys feel extremely confident that the company will have no liability
for damages resulting from the situation.
20. Because of a "fire sale," equipment obviously worth $200,000 was acquired at a cost of $155,000.  
21. A very large corporation's financial statements have the dollar amounts rounded to the nearest $1,000.
22. When the accountant has to choose between two acceptable alternatives, the accountant should select the
alternative that will report less profit, less asset amount, or a greater liability amount.
23. A large company purchases a $250 digital camera and expenses it immediately instead of recording it as an asset
and depreciating it over its useful life.

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Management Accounting (GMP, 2019-20)
Mechanics & Principles of Recording Financial Transactions

24. A company borrowed $100,000 in December and will make its only payment for interest when the note comes
due six months later. The total interest for the six months will be $3,600. On the December income statement the
accountant reported Interest Expense of $600.
25. Near the end of the current year, a company required a customer to pay $200,000 as an advance payment for
goods to be delivered in the following year. At the end of the current year the company reported the $200,000 as a
liability on its balance sheet.

Exercise 2: Transactions & the Accounting Equation

Answers
TRANSACTIONS
A D E O I L
Received cash from owner as original investment + +
Received cash for services provided (sold) + +
Purchased equipment for cash +,-
Paid utilities for month - +
Paid creditors on account - -
Received cash for services provided to cash -,+
customers
Purchased land by signing a nine-month, non- + +
interest-bearing note payable
Charged customers for service provided on + +
account
Paid cash for miscellaneous expenses incurred - +
Paid the balance of the non-interest-bearing note - -
payable
Purchased office supplies on account + +
Paid cash to stockholders for dividends - +
Recorded cost of supplies used during the month

Exercise 3: Revisiting the Accounting Equation

Use the accounting equation & record journal entries for the transactions below:

1. Tony Ornega opened Ornega Repair Service by investing $4,300 in cash and $1,600 in repair equipment.
2. Paid $800 for the current month’s rent.
3. Purchased repair supplies on credit, $1,100.
4. Purchased additional repair equipment for cash, $600.
5. Paid salary to a helper, $900.
6. Paid $400 of repair supplies purchased on credit
7. Accepted cash for repairs completed, $3,720.
8. Withdrew $1,000 in cash as Dividends.

S.No. Particulars Debit (Rs.) Credit (Rs.)

1 Cash Dr 4300

Equipment Dr 1600

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Management Accounting (GMP, 2019-20)
Mechanics & Principles of Recording Financial Transactions

Owners’ Capital Cr 5900

2 Rent Expense Dr 800

Cash Cr 800

3 Supplies Expense Dr 1100

Accounts Payable Cr 1100

4 Equipment Dr 600

Cash Cr 600

5 Salary Expense Dr 900

Cash Cr 900

6 Accounts Payable Dr 400

Cash Cr 400

7 Cash Dr 3720

Sale of Services (Income) Cr 3720

8 Dividends Dr 1000

Cash Cr 1000

Exercise 4: The Concept of Normal Balances

The customary classifications for accounts listed in the chart of accounts are listed below. Classify each account by
inserting the appropriate letter in the classification column and indicate the normal balance by inserting a check
mark in the debit column or the credit column.

CLASSES: A. Assets B. Liabilities C. Stockholders’ equity D. Revenue E. Expenses

Normal Balance
ACCOUNTS
Classification Debit Credit
Cash Asset √
Notes Payable Liability √
Supplies Expense Expense √
Unearned Fees (Fees Collected in Advance) Liability √
Land Asset √
Prepaid Insurance Asset √
Capital Stock (Share Capital) Owners Capital √
Unearned Rent (Rent Collected in Advance) Liability √

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Management Accounting (GMP, 2019-20)
Mechanics & Principles of Recording Financial Transactions

Rent Expense Expense √

Office Equipment Asset √
Accounts Receivable Asset √

Exercise 5: Passing of Journal Entries

For Bush Designs, indicate the accounts to be debited and credited in recording the selected transactions described
below.

TRANSACTIONS Debit Credit

Paid cash dividends to stockholders Dividends Cash
Received cash for services sold Cash Sale of Services
(Income)
Purchased supplies for cash Supplies Expense Cash
Purchased building and office equipment, paying 10% in cash and Building Cash
giving a note for the balance Office Equipment Notes Payable
Paid creditors on account Accounts Payable Cash
Fees earned from customers on account Accounts Sale of Services
Receivable (Income)
Discovered an error in collecting cash on an account receivable from a Accounts Cash
customer. Reimbursed the customer in cash for the overpayment Receivable
Received cash from customers on account Cash Accounts
Receivable
Recorded supplies used for month Not a Transaction Not a Transaction
Paid wages to employees Wages Cash

On the basis of your answers to the above, you are required to pass the journal entries for each transaction

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