Concept explainers
Recording Transactions (in a Journal and T-Accounts); Preparing a
Deliberate Speed Corporation (DSC) was incorporated as a private company. The company’s accounts included the following at June 30:
During the month of July, the company had the following activities:
- a. Issued 4,000 shares of common stock for $400,000 cash.
- b. Borrowed $100,000 cash from a local bank, payable in two years,
- c. Bought a building for $182,000; paid $82,000 in cash and signed a three-year note for the balance,
- d. Paid cash for equipment that cost $200,000.
- e. Purchased supplies for $30,000 on account.
Required:
- 1. Analyze transactions (a)-(e) to determine their effects on the
accounting equation , similar to Exhibit 2.5. - 2. Record the transaction effects determined in requirement 1 using a
journal entry format. - 3. Summarize the journal entry effects from requirement 2 using T-accounts.
- 4. Prepare a trial balance at July 31,
- 5. Prepare a classified balance sheet at July 31.
- 6. As of July 31, has the financing for DSC’s investment in assets primarily come from liabilities or stockholders’ equity?
Requirement – 1
To analyze: The given transaction, and explain their effect on the accounting equation.
Explanation of Solution
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Accounting equation for each transaction is as follows:
Figure (1)
Therefore, the total assets are equal to the liabilities and stockholder’s equity.
Requirement – 2
To record: The journal entries based on requirement 1.
Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Journal entries of Company D are as follows:
a. Issuance of common stock:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 400,000 | |||
Common stock (+SE) | 400,000 | |||
(To record the issuance of common stock) |
Table (1)
- Cash is an assets account and it increased the value of asset by $400,000. Hence, debit the cash account for $400,000.
- Common stock is a component of stockholder’s equity and it increased the value of stockholder’s equity by $400,000, Hence, credit the common stock for $400,000.
b. Cash borrowed from bank (long term)
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Cash (+A) | 100,000 | |||
Notes payable (+L) | 100,000 | |||
(To record cash borrowed from bank) |
Table (2)
- Cash is an assets account and it increased the value of asset by $100,000. Hence, debit the cash account for $100,000.
- Notes payable is a liability account, and it increased the value of liabilities by $100,000. Hence, credit the notes payable for $100,000.
c. Building purchased on account and in cash:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Building (+A) | 182,000 | |||
Cash (-A) | 82,000 | |||
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 $182,000. Hence, debit the building account for $182,000.
- Cash is an assets account and it decreased the value of asset by $82,000. Hence, credit the cash account for $82,000.
- 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) | 200,000 | |||
Cash (-A) | 200,000 | |||
(To record purchase of equipment in cash) |
Table (4)
- Equipment is an assets account and it increased the value of asset by $200,000. Hence, debit the equipment account for $200,000.
- Cash is an assets account and it decreased the value of asset by $200,000. Hence, credit the cash account for $200,000.
e. Purchase of supplies on account:
Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
Supplies (+A) | 30,000 | |||
Accounts payable (+L) | 30,000 | |||
(To record purchase of supplies on account) |
Table (5)
- Supplies are an assets account and it increased the value of asset by $30,000. Hence, debit the supplies account for $30,000.
- Accounts payable is a liability account and it increased the value of liability by $30,000. Hence, credit the liability account by $30,000.
Requirement – 3
To prepare: T-account for each account listed in the requirement 2.
Explanation of Solution
T-account:
T-account refers to an individual account, where the increasesor decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.
This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:
- (a) The title of the account
- (b) The left or debit side
- (c) The right or credit side
T-accounts of company D are as follows:
Cash (A) | |||
Beg. | 36,000 | ||
(a) | 400,000 | 82,000 | (c) |
(b) | 100,000 | 200,000 | (d) |
End. | 254,000 |
Supplies (A) | |||
Beg. | 7,000 | ||
(e) | 30,000 | ||
End. | 37,000 |
Equipment (A) | |||
Beg. | 118,000 | ||
(d) | 200,000 | ||
End. | 318,000 |
Buildings (A) | |||
Beg. | 100,000 | ||
(c) | 182,000 | ||
End. | 282,000 |
Land (A) | |||
Beg. | 200,000 | ||
End. | 200,000 |
Accounts payable (L) | |||
20,000 | Beg. | ||
30,000 | (e) | ||
50,000 | End. |
Note payable (L) | ||||
2,000 | Beg. | |||
100,000 | (b) | |||
100,000 | (c) | |||
202,000 | End. |
Common stock (SE) | |||
180,000 | Beg. | ||
400,000 | (a) | ||
580,000 | End. |
Retained earnings (SE) | |||
259,000 | Beg. | ||
259,000 | End. |
Requirement – 4
To prepare: The trial balance of Company D at July 31.
Explanation of Solution
Trial balance:
Trial balance is the summary of accounts, and their debit and credit balances at a given time. It is usually prepared at end of the accounting period. Debit balances are listed in left column and credit balances are listed in right column. The totals of debit and credit column should be equal. Trial balance is useful in the preparation of the financial statements.
Trial balance of Company D is as follows:
Company D | ||
Adjusted Trial Balance | ||
At July, 31 | ||
Accounts | Debit ($) | Credit ($) |
Cash | 254,000 | |
Supplies | 37,000 | |
Equipment | 318,000 | |
Building | 282,000 | |
Land | 200,000 | |
Accounts payable | 50,000 | |
Notes payable | 202,000 | |
Common stock | 580,000 | |
Retained earnings | 259,000 | |
Totals | $1,091,000 | $1,091,000 |
Table (6)
Therefore, the total of debit, and credit columns of trial balance is $1,091,000 and agree.
Requirement – 5
To prepare: The classified balance sheet of Company D 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 D is as follows:
Figure (2)
Therefore, the total assets of Company D are$1,091,000, and the total liabilities and stockholders’ equity are $1,091,000.
Requirement – 6
Explanation of Solution
The invested amount of assets are primarily come from stockholder’s’ equity of Company D, because the stockholder’s equity (common stock) financed $839,000 of the Company D’s total assets, and liabilities financed $252,000.
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Chapter 2 Solutions
Loose Leaf For Fundamentals Of Financial Accounting
- 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_forwardPrepare journal entries to record the following transactions that occurred in April: A. on first day of the month, issued common stock for cash, $15,000 B. on eighth day of month, purchased supplies, on account, $1,800 C. on twentieth day of month, billed customer for services provided, $950 D. on twenty-fifth day of month, paid salaries to employees, $2,000 E. on thirtieth day of month, paid for dividends to shareholders, $500arrow_forward
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