Concept explainers
Recording Transactions (in a Journal and T-Accounts); Preparing a
Athletic Performance Company (APC) was incorporated as a private company. The company’s accounts included the following at July 1:
During the month of July, the company had the following activities:
- a. Issued 2.000 shares of common stock for $200,000 cash.
- b. Borrowed $30.000 cash from a local bank, payable in two years.
- c. Bought a building for $141,000; paid $41.000 in cash and signed a three-year note for the balance.
- d. Paid cash for equipment that cost $100.000.
- e. Purchased supplies for $ 10,000 on account.
Required:
- 1. Analyze transactions (a)−(e) to determine their effects on the
accounting equation. Use a spreadsheet format with a column for each account, enter the July 1 amounts in the first line under the account headings, and calculate ending balances as shown in Exhibit 2.5.TIP: You won’t need new accounts to record the transactions described above, so have a quick look at the ones listed before you begin.
TIP: In transaction (c), three different accounts are affected.
- 2. Record the transaction effects determined in requirement 1 using journal entries.
- 3. Summarize the
journal entry effects from requirement 2 using T-accounts.TIP: Create a T-account for each account listed above. Enter the July 1 balances as the month's beginning balances.
- 4. Prepare a trial balance at July 31.
- 5. Prepare a classified balance sheet at July 31.
- 6. As of July 31, has the financing for APC's investment in assets primarily come from liabilities or stockholders’ equity?
Requirement – 1
Explanation of Solution
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Spreadsheet for accounting transactions is as follows:
Figure (1)
Requirement – 2
To record:The journal entries based on requirement 1.
Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Journal entries of Company A are as follows:
(a) Issuance of common stock:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 200,000 | |||
Common stock (+SE) | 200,000 | |||
(To record the issuance of common stock) |
Table (1)
- Cash is an assets account and it increased the value of asset by $200,000. Hence, debit the cash account for $200,000.
- Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $200,000, Hence, credit the common stock for $200,000.
(b) Cash borrowed from bank (long term)
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 30,000 | |||
Notes payable (+L) | 30,000 | |||
(To record cash borrowed from bank) |
Table (2)
- Cash is an assets account and it increased the value of asset by $30,000. Hence, debit the cash account for $30,000.
- Notes payable is a liability account, and it increased the value of liabilities by $30,000. Hence, credit the notes payable for $30,000.
(c) Building purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Building (+A) | 141,000 | |||
Cash (-A) | 41,000 | |||
Notes payable (+L) | 100,000 | |||
(To record purchase of building on account and in cash) |
Table (3)
- Building is an assets account and it increased the value of asset by $141,000. Hence, debit the building account for $141,000.
- Cash is an assets account and it decreased the value of asset by $41,000. Hence, credit the cash account for $41,000.
- Notes payable is a liability account, and it increased the value of liabilities by $100,000. Hence, credit the notes payable for $100,000.
(d) Equipment purchased:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Equipment (+A) | 100,000 | |||
Cash (-A) | 100,000 | |||
(To record purchase of equipment in cash) |
Table (4)
- Equipment is an assets account and it increased the value of asset by $100,000. Hence, debit the equipment account for $100,000.
- Cash is an assets account and it decreased the value of asset by $100,000. Hence, credit the cash account for $100,000.
(e) Purchase of supplies on account:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Supplies (+A) | 10,000 | |||
Accounts payable (+L) | 10,000 | |||
(To record purchase of supplies on account and in cash) |
Table (5)
- Supplies are an assets account and it increased the value of asset by $10,000. Hence, debit the supplies account for $10,000.
- Accounts payable is a liability account and it increased the value of liability by $10,000. Hence, credit the accounts payable by $10,000.
Requirement – 3
To prepare: T-account for each account listed in the spreadsheet.
Explanation of Solution
T-account:
T-account refers to an individual account, where the increasesor decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.
This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
T-accounts of company A are as follows:
Requirement – 4
To prepare: The trial balance of Company A at July 31.
Explanation of Solution
Trial balance:
Trial balance is the summary of accounts, and their debit and credit balances at a given time. It is usually prepared at end of the accounting period. Debit balances are listed in left column and credit balances are listed in right column. The totals of debit and credit column should be equal. Trial balance is useful in the preparation of the financial statements.
Trial balance of Company A is as follows:
Company A | ||
Adjusted Trial Balance | ||
At July, 31 | ||
Accounts | Debit ($) | Credit ($) |
Cash | 105,000 | |
Supplies | 15,000 | |
Equipment | 118,000 | |
Building | 341,000 | |
Land | 90,000 | |
Accounts payable | 14,000 | |
Notes payable | 147,000 | |
Common stock | 508,000 | |
Retained earnings | 0 | |
Totals | $669,000 | $669,000 |
Table (6)
Therefore, the total of debit, and credit columns of trial balance is $669,000 and agree.
Requirement – 5
To prepare: The classified balance sheet of Company A at July 31.
Explanation of Solution
Classified balance sheet:
This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.
Classified balance sheet of Company A is as follows:
Figure (2)
Therefore, the total assets of Company A are$669,000, and the total liabilities and stockholders’ equity are $669,000.
Requirement – 6
Explanation of Solution
The invested amount of assets are primarily come from stockholder’s’ equity of Company A, because the stockholder’s equity (common stock) financed $508,000 of the Company A’s total assets, and liabilities financed $161,000.
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Chapter 2 Solutions
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- Transaction Analysis and Financial Statements Expert Consulting Services Inc. was organized on March 1 by two former college roommates. The corporation provides computer consulting services to small businesses. The following transactions occurred during the first month of operations: March 2: Received contributions of $20,000 from each of the two principal owners of the new business in exchange for shares of stock. March 7: Signed a two-year promissory note at the bank and received cash of $15,000. Interest, along with the $15,000, will be repaid at the end of the two years. March 12: Purchased $700 in miscellaneous supplies on account. The company has 30 days to pay for the supplies. March 19: Billed a client $4,000 for services rendered by Expert in helping to install a new computer system. The client is to pay 25% of the bill upon its receipt and the remaining balance within 30 days. March 20: Paid $1,300 bill from the local newspaper for advertising for the month of March. March 22: Received 25% of the amount billed to the client on March 19. March 26: Received cash of $2,800 for services provided in assisting a client in selecting software for its computer. March 29: Purchased a computer system for $8,000 in cash. March 30: Paid $3,300 of salaries and wages for March. March 31: Received and paid $1,400 in gas, electric, and water bills. Required Prepare a table to summarize the preceding transactions as they affect the accounting equation. Use the format in Exhibit 3-1. Identify each transaction with the date. Prepare an income statement for the month of March. Prepare a classified balance sheet at March 31. From reading the balance sheet you prepared in part (3), what events would you expect to take place in April? Explain your answer.arrow_forwardEntries Prepared from a Trial Balance and Proof of the Cash Balance Russell Company was incorporated on January 1 with the issuance of capital stock in return for $120,000 of cash contributed by the owners. The only other transaction entered into prior to beginning operations was the issuance of a $50,000 note payable in exchange for equipment and fixtures. The following trial balance was prepared at the end of the first month by the bookkeeper for Russell Company: Required Determine the balance in the Cash account. Identify all of the transactions that affected the Cash account during the month. Use a T account to prove what the balance in Cash will be after all transactions are recorded.arrow_forwardJournal entries and trial balance On August 1, 20Y7, Rafael Masey established Planet Realty, which completed the following transactions during the month: a. Rafael Masey transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, 17,500. b. Purchased supplies on account, 2,300. c. Earned sales commissions, receiving cash, 13,300. d. Paid rent on office and equipment for the month, 3,000. e. Paid creditor on account, 1,150. f. Paid dividends, 1,800. g. Paid automobile expenses (including rental charge) for month, 1,500, and miscellaneous expenses, 400. h. Paid office salaries, 2,800. i. Determined that the cost of supplies used was 1,050. Instructions 1. Journalize entries for transactions (a) through (i), using the following account titles: Cash, Supplies, Accounts Payable, Common Stock, Dividends, Sales Commissions, Rent Expense, Office Salaries Expense, Automobile Expense, Supplies Expense, Miscellaneous Expense. Journal entry explanations may be omitted. 2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance. 3. Prepare an unadjusted trial balance as of August 31, 20Y7. 4. Determine the following: a. Amount of total revenue recorded in the ledger. b. Amount of total expenses recorded in the ledger. c. Amount of net income for August. 5. Determine the increase or decrease in retained earnings for August.arrow_forward
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June 28: Received and paid gas, electric, and water bills. The total amount is $2,700. June 29: Received the landlords bill for $2,200 for rent on the office space that Neveranerror leases. The bill is payable by the 10th of the following month. June 30: Paid salaries and wages for June. The total amount is $5,670. June 30: Billed $18,400 to clients for the second half of June. June 30: Declared and paid dividends in the amount of $6,000. Required Prepare journal entries on the books of Neveranerror Inc. to record the transactions entered into during the month. Ignore depreciation expense and interest expense. Prepare a trial balance at June 30. Prepare the following financial statements: Income statement for the month of June Statement of retained earnings for the month of June Classified balance sheet at June 30 Assume that you have just graduated from college and have been approached to join this company as an accountant. From your reading of the financial statements for the first month, would you consider joining the company? Explain your answer. Limit your answer to financial considerations only.arrow_forwardPrepare journal entries to record the following transactions. Create a T-account for Cash, post any entries that affect the account, and calculate the ending balance for the account. Assume a Cash beginning balance of $16,333. A. February 2, issued stock to shareholders, for cash, $25,000 B. March 10, paid cash to purchase equipment, $16,000arrow_forwardThe transactions completed by PS Music during June 20Y5 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the businesss operations: July 1. Peyton Smith made an additional investment in PS Music in exchange for common stock by depositing 5,000 in PS Musics checking account. 1. Instead of continuing to share office space with a local real estate agency, Peyton decided to rent office space near a local music store. Paid rent for July, 1,750. 1. Paid a premium of 2,700 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a one-year period. 2. Received 1,000 on account. 3. On behalf of PS Music, Peyton signed a contract with a local radio station, KXMD, to provide guest spots for the next three months. The contract requires PS Music to provide a guest disc jockey for 80 hours per month for a monthly fee of 3,600. Any additional hours beyond 80 will be billed to KXMD at 40 per hour. In accordance with the contract, Peyton received 7,200 from KXMD as an advance payment for the first two months. 3. Paid 250 on account. 4. Paid an attorney 900 for reviewing the July 3 contract with KXMD. (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from Office Mart, 7,500. 8. Paid for a newspaper advertisement, 200. 11. Received 1,000 for serving as a disc jockey for a party. 13. Paid 700 to a local audio electronics store for rental of digital recording equipment. 14. Paid wages of 1,200 to receptionist and part-time assistant. Enter the following transactions on Page 2 of the two-column journal: 16. Received 2,000 for serving as a disc jockey for a wedding reception. 18. Purchased supplies on account, 850. 21. Paid 620 to Upload Music for use of its current music demos in making various music sets. 22. Paid 800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23. Served as disc jockey for a party for 2,500. Received 750, with the remainder due August 4, 20Y5. 27. Paid electric bill, 915. 28. Paid wages of 1,200 to receptionist and part-time assistant. 29. Paid miscellaneous expenses, 540. 30. Served as a disc jockey for a charity ball for 1,500. Received 500, with the remainder due on August 9, 20Y5. 31. Received 3,000 for serving as a disc jockey for a party. 31. Paid 1,400 royalties (music expense) to National Music Clearing for use of various artists music during July. 31. Paid dividends, 1,250. PS Musics chart of accounts and the balance of accounts as of July 1, 20Y5 (all normal balances), are as follows: Instructions 1. Enter the July 1, 20Y5, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column, and place a check mark () in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 20Y5.arrow_forward
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