Concept explainers
1.
To prepare: The
1.
Explanation of Solution
Journal:
Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.
The accounting equation implies the relationship between the assets, liabilities, and the stockholders equity. The balance of both the assets and the liabilities, stockholders equity must be equally balanced. The accounting equation is as follows;
- 1. Journalize the issuance of common stock.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 1 | Cash (A+) | 16,000 | |
Common stock (SE+) | 16,000 | ||
(To record the issuance of common stock to investors) |
Table (1)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $16,000.
- Common stock is a component of
stockholder equity account. Thus, an increase in common stock increases the stockholders equity account. Hence, common stock account is being credited to increase its balance by $16,000.
- 2. Journalize the payment of rent in advance.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 2 | Prepaid rent (A+) | 2,400 | |
Cash (A–) | 2,400 | ||
(To record the payment of rent in advance) |
Table (2)
- Prepaid rent is an asset account. Thus, an increase in prepaid rent increases the asset account. Hence, debit prepaid rent account by $2,400.
- Cash is an asset account. Thus, a decrease in cash decreases the asset account. Hence, credit cash account by $2,400.
- 3. Journalize the purchase of supplies.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 3 | Supplies (A+) | 300 | |
Cash (A–) | 300 | ||
(To record the purchase of supplies) |
Table (3)
- A supply is an asset account. Thus, an increase in supplies increases the asset account. Hence, debit supplies account by $300.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $300.
- 4. Journalize the amount deposited in bank by signing a note.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 4 | Cash (A+) | 10,000 | |
Notes payable (L+) | 10,000 | ||
(To record the amount received by signing a note) |
Table (4)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $10,000.
- Notes payable is a liability account. Thus, an increase in notes payable increases the liability account. Hence, notes payable account is being credited to increase its balance by $10,000.
- 5. Journalize the purchase of equipment and land.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 5 | Equipment (A+) | 2,500 | |
Land (A+) | 7,500 | ||
Cash (A–) | 10,000 | ||
(To record the purchase of equipment and the purchase of land) |
Table (5)
- Equipment is an asset account. Thus, an increase in equipment increases the asset account. Hence, debit equipment account by $2,500.
- Land is an asset account. Thus, an increase in land increases the asset account. Hence, debit land account by $7,500.
- Accounts payable is a liability account. Thus, an increase in accounts payable increases the liability account. Hence, account payable account is being credited to increase its balance by $10,000.
- 6. Journalize the advertisement expenses.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 6 | Advertisement expenses (E+, SE-) | 425 | |
Cash (A-) | 425 | ||
(To record the advertisement expenses ) |
Table (6)
- Advertisement expense is an expense account which comes under
Retained earnings in stockholder’s equity. Thus, an increase in advertisement expense account decreases the stockholder’s equity account. Hence, advertisement expenses account is being debited to increase its balance by $425. - Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $425.
- 7. Journalize the sales made partly for cash and partly on account.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 7 | Cash (A+) | 1,525 | |
275 | |||
Service revenue (R+, SE+) | 1,800 | ||
(To record the sales made partly for cash and partly on account) |
Table (7)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $1,525.
- Accounts receivable is an asset account. Thus, an increase in accounts receivable increases the asset account. Hence, debit accounts receivable account by $275.
- Sales revenue is a stockholder’s equity account. Thus, an increase in service revenue increases the stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $1,800.
- 8. Journalize the amount received from customer.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 8 | Cash (A+) | 50 | |
Accounts receivable (A–) | 50 | ||
(To record the cash receipt for the service performed on account) |
Table (8)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $50.
- Accounts receivable is an asset account. Thus, a decrease in accounts receivable decreases the asset account. Hence, credit accounts receivable account by $50.
- 9. Journalize the payment made for repair.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 9 | Repairs and maintenance expense (E+, SE–) | 120 | |
Cash (A-) | 120 | ||
(To record the payment made for the repair charges) |
Table (9)
- Repairs and maintenance expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in repairs and maintenance expense account decreases the stockholder’s equity account. Hence, Repairs and maintenance expense account is being debited to increase its balance by $120.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $120.
- 10. Journalize the payment made for the wages.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 28 | Wages expense (E+, SE–) | 420 | |
Cash (A–) | 420 | ||
(To record the payment made for the employee wages) |
Table (10)
- Wages expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in wages expense account decreases the stockholder’s equity account. Hence, wages expense account is being debited to increase its balance by $420.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $420.
2.
To show: The unadjusted ending balances in T-accounts.
2.
Explanation of Solution
T-account:
An account is referred to as a 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:
- The title of the account
- The left or debit side
- The right or credit side
The posting of the journal entries to the T accounts are as follows:
Cash (A) | |||||||
Beginning Balance | $0 | 2. | $2400 | ||||
1. | $ 16,000 | 3. | $300 | ||||
4. | $10,000 | 5. | $10,000 | ||||
7. | $1,525 | 6. | $425 | ||||
8. | $50 | 9. | $120 | ||||
10. | $420 | ||||||
Total | $ 27,575 | Total | $13,665 | ||||
Ending Balance | $13,910 | ||||||
Supplies (A) |
|||||||
Beginning Balance | $0 | ||||||
3. | 300 | ||||||
Ending Balance | $300 |
Accounts Receivable (A) | |||
Beginning Balance | $0 | ||
7. | 275 | 8. | $50 |
Ending Balance | $225 | ||
Prepaid Rent(A) |
|||
Beginning Balance | $0 | ||
2. | $2,400 | ||
Ending Balance | $2,400 | ||
Land (A) | |||
Beginning Balance | $0 | ||
5. | $7,500 | ||
Ending Balance | $7,500 |
Equipment (A) | |||
Beginning Balance | $0 | ||
5. | $2,500 | ||
Ending Balance | $2,500 |
Advertising expense (E) | |||
Beginning Balance | $0 | ||
6. | $425 | ||
Ending Balance | $425 |
Wages expense(E) | |||
Beginning Balance | $0 | ||
10. | $420 | ||
Ending Balance | $420 | ||
Repairs expense (E) | |||
Beginning Balance | $0 | ||
9. | $120 | ||
Ending Balance | $120 |
Notes Payable (L) | |||
Beginning Balance | $0 | ||
4. | $10,000 | ||
Ending Balance | $10,000 | ||
Common Stock (SE) | |||
Beginning Balance | $0 | ||
16. | $16,000 | ||
Ending Balance | $16,000 |
Sales Revenue (R) | |||
Beginning Balance | $ | ||
7. | $1,800 | ||
Ending Balance | $425 |
3.
To prepare: The unadjusted
3.
Explanation of Solution
Unadjusted trial balance:
Unadjusted trial balance is that statement which contains complete list of accounts with their unadjusted balances. This statement is prepared at the end of every financial period.
The unadjusted Trial balance of Company B at the end of February is prepared as follows:
Company B | ||
Unadjusted Trial Balance | ||
At February 28 | ||
Particulars | Debit | Credit |
Cash | $ 13,910 | |
Accounts Receivable | 225 | |
Supplies | 300 | |
Prepaid Rent | 2,400 | |
Land | 7,500 | |
Equipment | 2,500 | |
Notes Payable | 10,000 | |
Common Stock | 16,000 | |
Sales Revenue | 1,800 | |
Advertising Expense | 425 | |
Salaries and Wages Expense | 420 | |
Repairs and Maintenance Expense | 120 | |
Total | $ 27,800 | $ 27,800 |
Table (11)
The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $27,800.
4.
To calculate: The preliminary net income and net profit margin and determine whether the net profit is better or worse than the competitor.
4.
Explanation of Solution
Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.
The preliminary net income of the company is determined as follows:
Particulars | Amount ($) | Amount ($) |
Revenues: | ||
Sales Revenue | $1,800 | |
Total Revenues | 1,800 | |
Less: Expenses: | ||
Repair Expense | 120 | |
Wages Expense | 420 | |
Advertising Expense | 425 | |
Total Expenses | 965 | |
Net Income | $835 |
Table (8)
The net profit margin of the Company is determined as follows:
Company B is performing better than its competitor with a net profit margin of 46.4%.
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Chapter 3 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_forwardEFFECTS OF TRANSACTIONS (BALANCE SHEET ACCOUNTS) Jon Wallace started a business. During the first month (March 20--), the following transactions occurred. Show the effect of each transaction on the accounting equation: Assets= Liabilities + Owners Equity. After each transaction, show the new account totals. (a) Invested cash in the business, 30,000. (b) Bought office equipment on account, 4,500. (c) Bought office equipment for cash, 1,600. (d) Paid cash on account to supplier in transaction (b), 2,000. EFFECTS OF TRANSACTIONS (REVENUE, EXPENSE, WITHDRAWALS) This exercise is an extension of Exercise 2-3B. Lets assume Jon Wallace completed the following additional transactions during March. Show the effect of each transaction on the basic elements of the expanded accounting equation: Assets = Liabilities + Owners Equity (Capital Drawing + Revenues Expenses). After transaction (k), report the totals for each element. Demonstrate that the accounting equation has remained in balance. (e) Performed services and received cash, 3,000. (f) Paid rent for March, 1,000. (g) Paid March phone bill, 68. (h) Jon Wallace withdrew cash for personal use, 800. (i) Performed services for clients on account, 900. (j) Paid wages to part-time employee, 500. (k) Received cash for services performed on account in transaction (i), 500.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
- Journal Entries Overnight Delivery Inc. is incorporated on February 1 and enters into the following transactions during its first month of operations: February 15: Received $8,000 cash from customer accounts. February 26: Provided $16,800 of services on account during the month. February 27: Received a $3,400 bill from the local service station for gas and oil used during February. February 28: Paid $400 for wages earned by employees for the month. February 28: Paid $3,230 for February advertising. February 28: Declared and paid $2,000 cash dividends to stockholders. Required Prepare journal entries on the books of Overnight to record the transactions entered into during February. Explain why you agree or disagree with the following: The transactions on February 28 all represent expenses for the month of February because cash was paid. The transaction on February 27 does not represent an expense in February because cash has not yet been paid.arrow_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_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
- Prepare journal entries to record the following transactions: A. December 1, collected balance due from customer account, $5,500 B. December 12, paid creditors for supplies purchased last month, $4,200 C. December 31, paid cash dividend to stockholders, $1,000arrow_forwardDiscuss how each of the following transactions for Watson, International, will affect assets, liabilities, and stockholders equity, and prove the companys accounts will still be in balance. A. An investor invests an additional $25,000 into a company receiving stock in exchange. B. Services are performed for customers for a total of $4,500. Sixty percent was paid in cash, and the remaining customers asked to be billed. C. An electric bill was received for $35. Payment is due in thirty days. D. Part-time workers earned $750 and were paid. E. The electric bill in C is paid.arrow_forwardOn March 1 of this year, B. Gervais established Gervais Catering Service. The account headings are presented below. Transactions completed during the month follow. a. Gervais deposited 25,000 in a bank account in the name of the business. b. Bought a truck from Kelly Motors for 26,329, paying 8,000 in cash and placing the balance on account, Ck. No. 500. c. Bought catering equipment on account from Luigis Equipment, 3,795. d. Paid the rent for the month, 1,255, Ck. No. 501. e. Bought insurance for the truck for one year, 400, Ck. No. 502. f. Sold catering services for cash for the first half of the month, 3,012. g. Bought supplies for cash, 185, Ck. No. 503. h. Sold catering services on account, 4,307. i. Received and paid the heating bill, 248, Ck. No. 504. j. Received a bill from GC Gas and Lube for gas and oil for the truck, 128. k. Sold catering services for cash for the remainder of the month, 2,649. l. Gervais withdrew cash for personal use, 1,550, Ck. No. 505. m. Paid the salary of the assistant, 1,150, Ck. No. 506. Required 1. Record the transactions and the balance after each transaction. 2. Total the left side of the accounting equation (left side of the equal sign), then total the right side of the accounting equation (right side of the equal sign). If the two totals are not equal, check the addition and subtraction. If you still cannot find the error, re-analyze each transaction.arrow_forward
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