Accounting

What the Numbers Mean 9e

Demonstration Problem
Chapter 4 Exercise 7
Record Transaction and Adjustments

Problem Definition

Enter the following column heading across the top of a sheet of paper:
Transaction/
Situation

Assets

Liabilities

Owners
Equity

Net
Income

Problem Definition

Enter the following column heading across the top of a sheet of paper:
Transaction/
Situation

Assets

Liabilities

Owners
Equity

Net
Income

Enter the transaction/situation number in the first column and show the effect, if
any, of the transaction entry or adjusting entry on the appropriate balance sheet
category or on the income statement by entering the amount and indicating
whether it is an addition (+) or a subtraction (-). Column headings reflect the
expanded balance sheet equation; items that affect net income should not be
shown as affecting owners equity. In some cases, only one column may be
affected because all of the specific accounts affected by the transaction are
included in that category. Transaction a has been done as an illustration. (Note:
As an alternative to using the horizontal model, you may write the journal entry
for each transaction or adjustment.)

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues

totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.

Problem Solution
Transaction/
Situation

Assets

a.

+550

Liabilities

Owners
Equity

Net
Income

+550

Problem Solution
Transaction/
Situation

Assets

a.

+550

Liabilities

Owners
Equity

Net
Income

+550

Journal entry:

Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550

Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . .

$550

Problem Solution
Transaction/
Situation

Assets

a.

+550

Liabilities

Owners
Equity

Net
Income

+550

Journal entry:

Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550

Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . .
Accounts receivable (an asset account) increases and
Service Revenue (a revenue account) also increases
which causes Net Income to increase.

$550

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues

totaled $550.
Paid an insurance premium of $360 for the coming
year. An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.

Problem Solution
Transaction/
Situation

b.

Assets

-360
+360

Liabilities

Owners
Equity

Net
Income

Problem Solution
Transaction/
Situation

b.

Assets

Liabilities

Owners
Equity

Net
Income

-360
+360

Journal entry:

Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . .

Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$360
$360

Problem Solution
Transaction/
Situation

b.

Assets

Liabilities

Owners
Equity

Net
Income

-360
+360

Journal entry:

Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . $360

Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$360

Prepaid Insurance (an asset account) increases and Cash

(an asset account) decreases. No effect on Net Income.

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues totaled

$550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued at
the end of the prior month.

Problem Solution
Transaction/
Situation

Assets

c.

-30

Liabilities

Owners
Equity

Net
Income

-30

Problem Solution
Transaction/
Situation

Assets

c.

-30

Liabilities

Owners
Equity

Net
Income

-30

Journal entry:

Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . $30

Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . .

$30

Problem Solution
Transaction/
Situation

Assets

c.

-30

Liabilities

Owners
Equity

Net
Income

-30

Journal entry:

Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . $30

Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . .

$30

Insurance Expense (an expense account) increases which

causes Net Income to decrease; Prepaid Insurance (an
asset account) decreases.

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues

totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.

Problem Solution
Transaction/
Situation

d.

Assets

-800

Liabilities

-800

Owners
Equity

Net
Income

Problem Solution
Transaction/
Situation

Assets

Liabilities

d.

-800

-800

Owners
Equity

Net
Income

Journal entry:

Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800

Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$800

Problem Solution
Transaction/
Situation

Assets

Liabilities

d.

-800

-800

Owners
Equity

Net
Income

Journal entry:

Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800

Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wages Payable (a liability account) decreases and Cash
(an asset account) also decreases. No effect on Net
Income.

$800

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues

totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.

Problem Solution
Transaction/
Situation

Assets

e.

-2,600

Liabilities

Owners
Equity

Net
Income

-2,600

Problem Solution
Transaction/
Situation

Assets

e.

-2,600

Liabilities

Owners
Equity

Net
Income

-2,600

Journal entry:

Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600

Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,600

Problem Solution
Transaction/
Situation

Assets

e.

-2,600

Liabilities

Owners
Equity

Net
Income

-2,600

Journal entry:

Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600

Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,600
Wages Expense (an expense account) increases which
causes Net Income to decrease; Cash (an asset account)
decreases.

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues totaled

$550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued at
the end of the prior month.

Problem Solution
Transaction/
Situation

f.

Assets

Liabilities

+600

Owners
Equity

Net
Income

-600

Problem Solution
Transaction/
Situation

f.

Assets

Liabilities

Owners
Equity

+600

Net
Income

-600

Journal entry:

Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600

Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . .

$600

Problem Solution
Transaction/
Situation

f.

Assets

Liabilities

Owners
Equity

+600

Net
Income

-600

Journal entry:

Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . .

$600

Wages Expense (an expense account) increases which

causes Net Income to decrease; Wages Payable (a
liability account) increases.

$600

Problem Definition
a.
b.
c.
d.
e.
f.
g.

Provided services to a client on account; revenues

totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable
accrued at the end of the prior month.

Problem Solution
Transaction/
Situation

g.

Assets

+1,500
-1,500

Liabilities

Owners
Equity

Net
Income

Problem Solution
Transaction/
Situation

g.

Assets

Liabilities

Owners
Equity

Net
Income

+1,500
-1,500

Journal entry:

Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500

Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .

$1,500

Problem Solution
Transaction/
Situation

g.

Assets

Liabilities

Owners
Equity

Net
Income

+1,500
-1,500

Journal entry:

Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500

Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .
$1,500
Cash (an asset account) increases and Accounts
Receivable (an asset account) decreases. No effect on Net
Income.

Problem Solution
Transaction/
Situation

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

Assets

+550
-360
+360
-30
-800
-2,600

Liabilities

Net
Income

+550

-30
-800
+600

+1,500
-1,500

Owners
Equity

-2,600
-600

Problem Solution
Journal entries:

a. Dr. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . $ 550

Cr. Service Revenue . . . . . . . . . . . . . . . . . . . . . .
$ 550
b. Dr. Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .
360
Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
360
c. Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . .
30
Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . .
30
d. Dr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . .
800
Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
800
e. Dr. Wages Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600
Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,600
f. Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Cr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . .
600
g. Dr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .
1,500

Accounting
What the Numbers Mean 9e
You should now have a better understanding
of recording transactions and adjustments.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.

David H. Marshall
Wayne W. McManus
Daniel F. Viele