EXERCISES FOR CHAPTER 2&3

We will now consider the events in the following exercises and analyze each in terms of its
effect on the accounting equation.
EXERCISE 1: Analysis of business transactions
To illustrate accounting for business transactions, let us assume that Gary Lyon has recently
become a CPA and opens his own accounting practice. Because the business has a single owner,
it is a proprietorship.
1. Gary Lyon’s invests $50,000 of his money to begin the business. Specifically, he deposits
$50,000 in a bank account entitled “Gary Lyon, CPA”.
2. Lyon purchases land for a future office location, paying cash of $40,000.
3. Lyon buys office supplies, agreeing to pay $500 within 30 days.
4. Gary Lyon earns service revenue by providing professional accounting services for his
clients. Assume he earns $5,500 and collects this amount in cash.
Lyon’s accounting practice has now completed four business transactions. Answer these
questions about the business:
A. How much in total assets does Lyon’s business have to work with?
B. How much of the total assets does Lyon actually own? How much does the business owe
outsiders?
5. Lyon performs services for a client who does not pay immediately. In return for his
accounting services, Lyon receives the client’s promise to pay the $3,000 amount within
one month.
6. During the month, Lyon pays $ 2,700 in cash expenses: office rent, $1,100; employee
salary, $1,200 (for a part-time assistant); and total electricity and gas, $400.
7. Lyon pays $400 to the store from which he purchased $500 worth of office supplies in
transaction 3. In accounting, we say that he pays $400 on account.
8. Lyon remodels his home at a cost of $30,000, paying cash from his personal funds.
9. In transaction 5, Gary Lyon performed services for a client on credit (or on account). Lyon
now collects $1,000 from the client.
10. An individual approaches Lyon about selling a parcel of land owned by the Gary Lyon,
CPA, business entity. Lyon and the other person agree to a sale price of $22,000 which is
equal to Lyon’s cost of the land.
11. Lyon withdraws $2,100 cash from the business for personal use.

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EXERCISE 2: Analysis of business transactions
Lleyton Cash has recently retired from playing professional tennis, so he decides to set up his
own tennis coaching academy.
1. He contributes $100,000 of his personal savings into a business bank account under the
name of Cash Coaching Services (CCS).
2. CCS purchases a new laptop computer for $2,000 from JB Technologies for cash. The
laptop will be classified as an item of office equipment for the business.
3. CCS sends an invoice to Aussie Wallabies for providing tennis coaching services totaling
$3,000. Aussies Wallabies will have 30 days’ credit.

LEDGER
ACCOUNTS

EXERCISE 3: Analysis of business transactions

Jill Smith opens an apartment-location business near a university campus. She is the sole owner
of the proprietorship which she names Campus Apartment Locators. During the first month of
operations, July 20XX, Smith engages in the following transactions:
1. She invests $35,000 of personal funds to start the business.
2. She purchases on credit office supplies costing $350.
3. She pays cash of $30,000 to acquire a block of land next to the campus. She intends to
use the land as a future building site for her business.
4. She locates apartments for clients and receives cash of $1,900.
5. She pays $100 on the account payable she created in transaction (b).
6. She pays $2,000 of personal funds for a vacation.
7. She pays cash expenses for office rent, $400, and electricity and gas, $100.
8. The business sells office supplies to another business for its cost of $150.
9. Smith withdraws cash of $1,200 for personal use.
Required
a. Analyse the preceding transactions in terms of their effects on the accounting equation of
Campus Apartment Locators. Use Exhibit 1.6 as a guide, but show balances only after the
last transactions.
b. Prepare the profit and loss statement, statement of O.E, and balance sheet of the
business after recording the transactions. Use Exhibit 1.7 as a guide.

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EXERCISE 4: Analysis of business transactions
On 1 August 20X5, Liz Shea opens Shea’s Research Service. She will be the owner of the
proprietorship. During the entity’s first 10 days of operations, the business completes these
transactions:
1. To begin operations, Shea deposits $40,000 of personal funds in a bank account entitled
“Shea’s Research Service”. The business receives the cash and gives Shea capital (owner’s
equity)
2. Shea pays $30,000 cash for a small building to be used as an office for the business.
3. Shea purchases office supplies for $500 on credit.
4. Shea pays cash of $6,000 for office furniture.
5. Shea pays $150 on the accounts payable she created in transaction (3)
6. Shea withdraws $1,000 cash for personal use.

EXERCISE 5
Let’s account for the revenues and expenses of the law practice of Sara Nichols, Solicitor, for the
month of July 20X1. We follow the same steps illustrated earlier in this chapter: analyze the
transaction, journalize, post to the ledger and prepare the trial balance.
1. Sarah Nichols invested $10,000 cash in a business bank account to open her law practice.
2. Sarah Nichols performed service for a client and collected $3,000 cash.
3. Sarah Nichols performed service for a client and billed the client for $500 on account
receivable.
4. Sarah Nichols earned $700 service revenue by performing legal service for a client. The
client paid Nichols $300 cash immediately. Nichols billed the remaining $400 to the client
on account receivable.
5. Sarah Nichols paid the following cash expenses: office rent, $900; employee salary,
$1,500; and electricity and gas, $500.
6. Sarah Nichols received an electricity bill for $120 and will pay this expense next week.
7. Sarah Nichols collected $200 cash from the client established in transaction 3.
8. Nichols paid the electricity bill that was received and recorded in transaction 6.
9. Nichols withdrew $1,100 cash for personal use.

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EXERCISE 6
The Trial Balance of Tomassini Computer Service Center on 1 March 20X2 lists the entity’s assets,
liabilities and O.E on that date.
Balance (USD-$)

Account title Debit Credit

Cash at bank 26,000

Accounts receivable 4,500

Accounts payable 2,000

Larry Tomassini, capital 28,500

Total 30,500 30,500

During March, the business engaged in the following transactions:

1. Borrowed $45,000 from the bank and signed a bill payable in the name of the business.
2. Paid cash of $40,000 to a real estate business to acquire land.
3. Performed service for a customer and received cash of $5,000.
4. Purchased supplies on credit, $300.
5. Performed customer service and earned revenue on credit, $2,600.
6. Paid $1,200 on account.
7. Paid the following cash expenses: salaries, $3.000; rent, $1,500; and interest, $400.
8. Received $3,100 on account.
9. Received a $200 electricity and gas bill that will be paid next week.
10. Withdrew $1,800 for personal use.
Required
a. Open the following accounts, with the balance indicated, in the ledger of Tommassin
Computer Service Center. Use the T-account format.
Assets – Cash at Bank, $26,000; Accounts Receivable, $4,500; Supplies, no balance; Land,
no balance;
Liabilities – Accounts Payable, $2,000; Bill Payable, no balance.
Owner’s equity – Larry Tomassini, Capital, $28,500; Larry Tomassini, Drawings, no
balance.
Revenues – Service Revenue, no balance.
Expenses – (none have balances) Salary Expense; Rent Expense; Electricity and Gas
Expense; Interest Expense.
b. Journalize the preceding transactions. Key journal entries by transaction letter.
c. Post to the ledger.
d. Prepare the trial balance of Tomassini Computer Service Center at 31 March 20X2.

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e. Calculate the net profit or net loss of the entity during the month of March 20X2. List
expenses in order from the largest to the smallest.

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EXERCISE 7
Monica Peters opened a medical practice in Perth, Western Australia. Record the following
transactions in the journal of Monica Peters, GP. Include an explanation with each journal entry.
June 1 Peters invested $64,000 cash in a business bank account to start her medical practice. The
business received the cash and gave Peters O.E in the business.
June 2 Purchased medical supplies on credit, $9,000.
June 2 Paid monthly office rent of $4,000.
June 3 Recorded $5,000 revenue for service rendered to patients. Received cash of $2,000 and
sent bills to patients for the remainder.

EXERCISE 8
After operating for several months, Monica Peters, GP, completed the following transactions
during the latter part of October.
Oct. 15Borrowed $50,000 from the bank, signing a bill payable.
Oct. 22Performed service for patients on credit, $4,000
Oct. 30Received cash on account from patients, $1,000.
Oct. 31 Received an electricity and gas bill, $200, which will be paid during November.
Oct. 31Paid monthly salary to nurse, $3,000
Oct. 31Paid interest expense of $2,500 on the bank loan.
Journalize the transactions of Monica Peters, GP. Include an explanation with each journal entry.

EXERCISE 9
Lisa Khoury purchased supplies on credit for $2,000. Two weeks later, Khoury paid $1,500 on
account.
1. Journalise the two transactions on the books of Lisa Khour. Include an explanation for each
transaction.
2. Open the Accounts Payable account and post to Accounts Payable. Calculate the balance, and
denote it as Bal.
3. How much does Khoury owe after both transactions? In which account does this amount
appear?

EXERCISE 10
Grant Tobias performed legal services for a client who could not pay immediately. Tobias
expected to collect the $3,000 the following month. A month later, Tobias received $2,000 cash
from the client.
1. Record the two transactions on the books of Grant Tobias, Solicitor. Include an explanation
for each transaction.
2. Open these accounts: Cash at Bank; Accounts Payable; Service Revenue. Post to all three
accounts. Calculate each account’s balance, and denote as Bal.

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3. Answer these questions based on your analysis:
a. How much did Tobias earn? Which account shows this amount?
b. How much in total assets did Tobias acquire as a result of the two transactions? Show the
amount of each asset?

Exercise 11 should be used in connection with Exercise 7

EXERCISE 11
Use the June transaction data for Monica Peters, GP, given in Daily Exercise 7.
1. Open the following T-account of Monica Peters, GP: Cash at Bank; Accounts Receivable;
Medical Supplies; Accounts Payable; Monica Peters, Capital; Service Revenue; Rent Expense.
2. After making the journal entries in Daily Exercise 7, post from the journal to the ledger. No
dates or posting references are required. Take the balance of each account, and denote it as
Bal.
3. Prepare the trial balance, complete with a proper heading, at 3 June 20X8.

EXERCISE 12
Kelly Electronics reported the following summarized data at 31 December 20X6. Accounts appear
in no particular order; dollar amounts are in millions.
Revenue $ 21 Other Liabilities $6

Other assets 20 Cash at Bank 4

Accounts Payable 1 Expenses 16

Capital 12

Prepare the trial balance of Kelly Electronics at 31 December 20X6.

EXERCISE 13: Correcting a trial balance (Obj. 5)

SARAH NICHOLS, SOLICITOR

TRIAL BALANCE

As at 31 July 20X1

Balance

Accounts Title Debit ($) Credit ($)

Cash at Bank 9,300

Accounts Receivable 700

Accounts Payable 0

Sarah Nichols, Capital 10,000

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 Sarah Nichols, Drawings 1,100

Service Revenue 4,200

Rent Expense 900

Salary Expense 1,500

Electricity & Gas Expense 620

Total 14,200 14,200

Sarah Nichols, Solicitor, prepared the business’s above trial balance. Suppose Nichols made two
errors in preparing the trial balance, as follows:
Error 1 – Nichols erroneously listed Accounts Receivable of $700 as a credit rather than as a
debit.
Error 2 – Nichols erroneously listed Service Revenue as a credit balance of $42,000 rather than
the correct amount of $4,200.
Consider each error separately.
1. For each error, calculate the incorrect trial balance totals for total debits and total credits.
2. Refer to the discussion of correcting trial balance errors and show how to correct each
error.

EXERCISE 14: Setting up a chart of accounts (Obj. 6)

Exhibit 2.10: Charts of Accounts – Account Practice of Gary Lyon, CPA
Assets Liabilities Owner’s Equity

10 Cash at Bank 201 Accounts Payable 301 Gary Lyon, Capital

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11 Accounts 231 Bills Payable 311 Gary Lyon, Drawings

1 Receivable
Profit and Loss Statement (part of Owner’s
Equity):
14 Office Supplies
1

15 Office furniture 401 Service 501 Rent Expense

1 Revenue

19 Land 502 Salary Expense

1

503 Elec.&Gas Expense

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Mid-Cities Apartment Locators helps students locate apartments because universities in some
Australian cities have insufficient student housing on their campuses. Kirk Lang, the owner pf
Mid-Cities Apartment Locators, is setting up the business’s chart of accounts after making an
initial investment of cash in the business.
Lang will perform apartment locator services for clients on credit. His office will need some
supplies, a computer (equipment) and furniture. Lang has borrowed money by signing a bill
payable to the bank. The business will also purchase on credit some of the things it needs.
Expenses of the business will include rent, electricity and gas, and advertising.
Prepare the chart of accounts for Mid-Cities Apartment Locators, including three-digit account
numbers. Use Exhibit 2.10 as a guide.

EXERCISE 15: Analyzing transactions without a journal (Obj. 7)

Erika Wolens established Sports Depot, a health club, with an initial cash investment of $80,000.
The business immediately purchased equipment on credit for $30,000.
1. Open the following T-accounts on the books of Sports Depot: Cash at Bank; Equipment;
Accounts Payable; Erika Wolens, Capital.
2. Record the first two transactions of Sports Depot directly in the T-account without using a
journal.
3. Calculate the balance in each account and show that total debits equal total credits.

EXERCISE 16: Using debits and credits with the accounting equation
Link to Accounting Equation. The Coca-Cola Company is famous worldwide for soft drinks.
Suppose, at the end of 20XX, Coca-Cola has total assets of US$25 billion and liabilities totaling
US$15 billion.
1. Write the company’s accounting equation, and label each element as a debit amount or a
credit amount.
2. Coca-Cola’s total revenues for 20XX are US$20 billion, and total expenses for the year are
US$16 billion. How much is Coca-Cola’s net profit (or net loss) for 20XX? Write the
equation to calculate Coca-Cola’s net profit, and indicate which element is a debit amount
and which element is a credit amount. Does net profit represent a net debit or a net
credit? Does net loss represent a net debit or a net credit? Review Exhibit 1.7 if needed.
3. Suppose, during 20XX, the owners of Coca-Cola withdrew US$2 billion in the form of
dividends (same as owner drawings). Did the dividends represent a debit amount or a
credit amount?
4. Considering both Coca-Cola’s net profit (or net loss) and dividends for 20XX, by how much
did the company’s O.E increase or decrease during 20XX? Was the increase in O.E a debit
amount or a credit amount?

EXERCISE 17: Analyzing and journalizing transactions

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Analyze the following transactions in the manner shown for the 1 December transaction of
Telemark Cellular. Also record each transaction in the journal. Explanations are not required.
Dec. 1 Paid electricity and gas expense of $700. (Analysis: The expense electricity and gas
expense is increased; therefore, debit Electricity and Gas Expense. The asset Cash
at Bank is decreased; therefore, credit Cash at Bank).
Dec. 1 Electricity and Gas Expense 700
Cash at Bank 700
Dec. 5 borrowed $7,000 cash, signing a bill payable.
Dec. 10 performed service on credit for a customer, $1,600.
Dec. 12 Purchased office furniture on credit, $800.
Dec. 19 Sold for $74,000 land that had cost this same amount.
Dec. 24 Purchased building for $140,000; signed a bill payable.
Dec. 27 Paid the liability created on 12 Dec.

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EXERCISE 18: Applying the rules of debit and credit
Refer to Exercise 2.3 for the transactions of Telemark Cellular.
1. Open the following T-accounts with their 1 Dec. balances: Cash at Bank, debit balance
$6,000; Land, debit balance $74,000; Toni Steers, Capital, credit balance $80,000.
2. Record the transactions of Exercise 2.3 directly in the T-accounts affected. Use the dates
as posting references. Journal entries are not required.
3. Calculate the 31 Dec. balance for each account, and prove that total debits equal total
credits.

EXERCISE 19: Journalizing transactions (Obj. 3)

Wellness Health Club engaged in the following transactions during March 20X3, its first month of
operations:
Mar. 1 Lou Stryker invested $45,000 of cash to start the business.
Mar. 2 Purchased office supplies of $200 on credit.
Mar. 4 Paid $40,000 cash for a building to use as a future office.
Mar. 6 Performed service for customers and received cash, $2,000.
Mar. 9 Paid $100 on accounts payable.
Mar. 17 Performed service for customers on credit, $1,600.
Mar. 23 Received $1,200 cash from a customer on account.
Mar. 31 Paid the following expenses: salary, $1,200; rent, $500
Required
Record the preceding transactions in the journal of Wellness Health Club. Key transactions by
date and include an explanation for each entry, as illustrated in the chapter. Use the following
accounts: Cash at Bank; Accounts Receivable; Office Supplies; Building; Accounts Payable; Lou
Stryker, Capital; Service Revenues; Salary Expense; Rent Expense.

Exercise 2.6: Posting to the ledger and preparing a trial balance (Obj. 4,5)
Refer to Exercise 2.5 for the transactions of Wellness Health Club.
Required
1. After journalizing the transactions of Exercise 2.5, post the entries to the ledger, using the
T-account format. Key transactions by date. Date the ending balance of each accounting
Mar. 31.
2. Prepare the trial balance of Wellness Health Club at 31 Mar. 20X3.

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EXERCISE 20: Describing transactions and posting (Obj. 2,3)
The journal of Rosenberg & Associates includes the following transaction entries for August 20X6.
Journal Page 5

Date Accounts and Explanation Post. Ref. Debit Credit

Aug. 2 Cash at Bank 18,000

Mathew Rosenberg, Capital 18,000

Aug. 5 Cash at Bank 15,000

Bill Payable 15,000

Aug. 9 Supplies 270

Accounts Payable 270

Aug. 11 Accounts Receivable 2,630

Sales Revenue 2,630

Aug. 14 Rent Expense 4,200

Cash at Bank 4,200

Aug. 22 Cash at Bank 1,400

Accounts Receivable 1,400

Aug. 25 Advertising Expense 350

Cash at Bank 350

Aug. 27 Accounts Payable 270

Cash at Bank 270

Aug. 31 Electricity and Gas Expense 220

Accounts Payable 220

Required
1. Describe each transaction.
2. Post the transactions to the ledger using the following account numbers: Cash at Bank,
110; Accounts Receivable, 120; Supplies, 130; Accounts Payable, 210; Bill Payable, 230;
Matthew Rosenberg, Capital, 310; Sales Revenue, 410; Rent Expense, 510; Advertising
Expense, 520; Electricity and Gas Expense, 530. Use dates, journal references and posting

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 references as illustrated in Exhibit 2.8. You may write the account numbers as posting
references directly in your book unless directed otherwise by your lecturer.
3. Calculate the balance in each account after posting. Prepare Rosenberg & Associates’ trial
balance at 31 August 20X6.

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