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Chapter 2
The Accounting Cycle: During the Period
REVIEW QUESTIONS
Question 2-1 (LO 2-1)
External transactions are transactions between the company and a separate economic entity.
Internal transactions do not include an exchange with a separate economic entity. Purchasing
supplies from a local vendor is classified as an external transaction.
(b) Accounts
Receivable Service Revenue
30,000 30,000
BRIEF EXERCISES
Brief Exercise 2-1 (LO 2-1)
Proper order:
(c) Use source documents to identify accounts affected by external
transactions.
(d) Analyze the impact of the transaction on the accounting equation.
(b) Assess whether the impact of the transaction results in a debit or
credit to the account balance.
(f) Record transactions using debits and credits.
(a) Post the transaction to the T-account in the general ledger.
(e) Prepare a trial balance.
(b)
Supplies 600
Cash 600
(Purchase office supplies for cash)
(c)
Rent Expense 800
Cash 800
(Pay rent for the current month)
(b)
Prepaid Insurance 4,200
Cash 4,200
(Purchase prepaid insurance with cash)
(c)
Equipment 20,000
Cash 20,000
(Purchase equipment with cash)
(d)
Cash 30,000
Notes Payable 30,000
(Obtain bank loan)
2. Postings on the left side (or debit side) of the cash T-account represent increases to
cash, such as receiving cash from customers, selling assets, borrowing money, and
issuing stock.
3. Postings on the right side (or credit side) of the cash T-account represent decreases
to cash, such as paying cash for rent, supplies, equipment, employee salaries,
utilities, repayment of debt, and dividends.
(b)
Supplies 20,000
Accounts Payable 20,000
(Purchase office supplies on account)
(c)
Salaries Expense 7,000
Cash 7,000
(Pay salaries for the current month)
Accounts
Supplies Payable Salaries Expense
0 0 0
(b) 20,000 20,000 (b) (c) 7,000
20,000 20,000 7,000
EXERCISES
Exercise 2-1 (LO 2-1)
1. d.
2. b.
3. a.
4. e.
5. c.
* One asset (cash) increases while another asset (accounts receivable) decreases.
Dual Effect
1. Issue 10,000 shares of common stock Assets
in exchange for $32,000 in cash. increase equity increases
2. Purchase land for $19,000. A note Assets Liabilities
payable is signed for the full amount. increase increase
3. Purchase storage containers for One asset (containers) increases
$8,000. and another asset (cash) decreases
4. Hire three employees for $2,000 per No effect on the accounting
month. equation
5. Receive cash of $12,000 in rental fees Assets
for the current month. increase equity increases
6. Purchase office supplies for $2,000 Assets Liabilities
on account. increase increase
7. Pay employees $6,000 for the first Assets
decrease equity decreases
Dual Effect
1. Paint houses in the current month for Assets
$15,000 on account. increase equity increases
2. Purchase painting equipment for One asset (equipment) increases
$16,000 cash. and another asset (cash) decreases
3. Purchase office supplies on account Assets Liabilities
for $2,500. increase increase
4. Pay employee salaries of $3,200 for Assets
the current month. decrease equity decreases
5. Purchase advertising to appear in the Assets
current month, $1,200. decrease equity decreases
6. Pay office rent of $4,400 for the Assets
current month. decrease equity decreases
7. Receive $10,000 from customers One asset (cash) increases and another
in (1) above. asset (accounts receivable) decreases
8. Receive cash of $5,000 in advance Assets Liabilities
from a customer that plans to have his increase increase
house painted in the following month.
Transaction Balance
Retained earnings, April 1 $13,000
1. Issue common stock for cash, $11,000 0
2. Provide services to customers on account, $8,500. +8,500
3. Provide services to customers in exchange for cash, $3,200. +3,200
4. Purchase equipment and pay cash, $7,600. 0
5. Pay rent for April, $1,100. −1,100
6. Pay employee salaries for April, $3,500. −3,500
7. Pay dividends to stockholders, $2,000. −2,000
Retained earnings, April 30 $18,100
(2)
Cash 6,800
Service Revenue 6,800
(Provide services for cash)
(3)
Rent Expense 1,300
Cash 1,300
(Pay current month’s rent)
(4)
Supplies 1,000
Accounts Payable 1,000
(Purchase office suppliers on account)
(5)
Salaries Expense 2,100
Cash 2,100
(Pay current month’s salaries)
February 7
Supplies 1,300
Accounts Payable 1,300
(Purchase beauty supplies on account)
February 14
Cash 2,900
Service Revenue 2,900
(Provide beauty services for cash)
February 15
Salaries Expense 900
Cash 900
(Pay salaries for current month)
February 25
Accounts Receivable 1,000
Service Revenue 1,000
(Provide beauty services on account)
February 28
Utilities Expense 300
Cash 300
(Pay utilities for current month)
March 5
Cash 9,000
Notes Payable 9,000
(Obtain bank loan)
March 10
Equipment 25,000
Cash 25,000
(Purchase construction equipment for cash)
March 15
Advertising Expense 1,100
Cash 1,100
(Purchase advertising for current month)
March 22
Accounts Receivable 18,000
Service Revenue 18,000
(Provide construction services on account)
March 27
Cash 13,000
Accounts Receivable 13,000
(Receive cash on account)
March 28
Salaries Expense 6,000
Cash 6,000
(Pay salaries for current month)
3. Pay a $500 utilities bill for the current Utilities Expense 500
period. Cash 500
Transaction (8) is not posted to the Cash T-account because a purchase on account
does not involve cash.
Unearned
Revenue Service Revenue
300 0
1,100 (6) 8,400 (1)
1,400 8,400
Advertising
Expense
0
(4) 1,000
1,000
(2)
Land 24,000
Notes Payable 24,000
(Purchase land with note payable)
(3)
Equipment 9,000
Cash 9,000
(Purchase storage containers)
(4)
No entry
(5)
Cash 13,000
Service Revenue 13,000
(Receive cash for current month’s rent)
(6)
Supplies 3,000
Accounts Payable 3,000
(Purchase office supplies on account)
(7)
Salaries Expense 9,000
Cash 9,000
(Pay salaries for the current month)
Accounts
Supplies Payable
0 0
(6) 3,000 3,000 (6)
3,000 3,000
Salaries Expense
0
(7) 9,000
9,000
Equipment Cash
Beg. 7,400 Beg. 26,100
(2) 21,000 21,000 (2)
4,200 (4)
1,000 (5)
5,400 (6)
(7) 15,000
(8) 6,000
28,400 15,500
Unearned
Rent Expense Revenue
Beg. 0 0 Beg.
(6) 5,400 6,000 (8)
5,400 6,000
25,000 9,500
PROBLEMS: SET A
Problem 2-1A (LO 2-2)
Stockholders’
Transaction Assets = Liabilities + Equity
1. Issue common stock in
Increase = No effect + Increase
exchange for cash.
2. Purchase business
Increase = Increase + No effect
supplies on account.
3. Pay for legal services
Decrease = No effect + Decrease
for the current month.
4. Provide services to
Increase = No effect + Increase
customers on account.
5. Pay employee salaries
Decrease = No effect + Decrease
for the current month.
6. Provide services to
Increase = No effect + Increase
customers for cash.
7. Pay for advertising for
Decrease = No effect + Decrease
the current month.
8. Repay loan from the
Decrease = Decrease + No effect
bank.
9. Pay dividends to
Decrease = No effect + Decrease
stockholders.
10. Receive cash from
customers in (4) No effect* = No effect + No effect
above.
11. Pay for supplies
Decrease = Decrease + No effect
purchased in (2) above.
*One asset (cash) increases and another asset (accounts receivable) decreases
Stockholders’ Stockholders’
Assets = Liabilities + Equity Assets = Liabilities + Equity
Bruins Company
Trial Balance
November 30
Accounts Debit Credit
Cash $ 40,000
Accounts Receivable 50,000
Supplies 1,100
Prepaid Rent 3,000
Equipment 60,800
Accounts Payable $ 17,000
Salaries Payable 5,000
Interest Payable 3,000
Unearned Revenue 9,000
Notes Payable 30,000
Common Stock 50,000
Retained Earnings 35,000
Dividends 1,100
Service Revenue 65,000
Salaries Expense 30,000
Rent Expense 12,000
Interest Expense 3,000
Supplies Expense 7,000
Utilities Expense 6,000
Totals $214,000 $214,000
PROBLEMS: SET B
Problem 2-1B (LO 2-2)
Stockholders’
Transaction Assets = Liabilities + Equity
1. Obtain a loan at the
Increase = Increase + No effect
bank
2. Purchase a machine to
use in operations for No effect* = No effect + No effect
cash.
3. Provide services to
Increase = No effect + Increase
customers for cash.
4. Pay employee salaries
Decrease = No effect + Decrease
for the current month.
5. Repay loan from the
Decrease = Decrease + No effect
bank in (1) above.
6. Customers pay cash in
Increase = Increase + No effect
advance of services.
7. Pay for maintenance costs
Decrease = No effect + Decrease
in the current month.
8. Pay for advertising in the
Decrease = No effect + Decrease
current month.
9. Purchase office supplies
Increase = Increase + No effect
on account.
10. Provide services to
Increase = No effect + Increase
customers on account.
11. Pay dividends to
Decrease = No effect + Decrease
stockholders.
May 19
Accounts Payable 425
Cash 425
(Pay cash on account)
May 25
Utilities Expense 135
Cash 135
(Pay utilities for the current month)
May 28
Unearned Revenue 300
Service Revenue 300
(Provide service previously paid)
May 31
Notes Payable 500
Cash 500
(Pay cash on note payable)
May 28
Insurance Expense 300
Prepaid Insurance 300
(Received services paid in advance)
May 31
Cash 500
Notes Receivable 500
(Receive cash on note receivable)
Stockholders’ Stockholders’
Assets = Liabilities + Equity Assets = Liabilities + Equity
+$300
May 2 +$300 = +$300 + $0 = $0 + $0
−$300
5 $0 = +$425 + −$425 +$425 = $0 + +$425
+$500
7 +$500 = +$500 + $0 = $0 + $0
−$500
+$200
14 $0 = $0 + $0 = $0 + $0
−$200
+$425
19 −$425 = −$425 + $0 = $0 + $0
−$425
25 −$135 = $0 + −$135 $0 = $0 + $0
28 $0 = −$300 + +$300 −$300 = $0 + −$300
+$500
31 −$500 = −$500 + $0 = $0 + $0
−$500
Utilities Expense
(10) 1,400
1,400
(10) December 30
Salaries Expense 7,000
Cash 7,000
(Pay salaries for December)
(11) December 31
Dividends 3,000
Cash 3,000
(Pay dividends)
ADDITIONAL PERSPECTIVES
Additional Perspective 2-1
Requirement 1
Entries are numbered for posting.
(1) July 1, 2015 Debit Credit
Cash 10,000
Common Stock 10,000
(Issue common stock to Suzie)
(2) July 1, 2015
Cash 10,000
Common Stock 10,000
(Issue common stock to Tony)
(3) July 1, 2015
Prepaid Insurance 4,800
Cash 4,800
(Purchase one-year insurance policy)
(4) July 2, 2015
Legal Fees Expense 1,500
Cash 1,500
(Pay legal fees for incorporation)
(5) July 4, 2015
Supplies (Office) 1,800
Accounts Payable 1,800
(Purchase office supplies on account)
(6) July 7, 2015
Advertising Expense 300
Cash 300
(Pay cash for advertising)
(7) July 8, 2015
Equipment (Bikes) 12,000
Cash 12,000
(Pay cash for mountain bikes)
(8) July 15, 2015
Cash 2,000
Service Revenue 2,000
(Receive cash for mountain bike clinic)
The company is getting smaller by asset size but sales are growing. The company may
be using its assets more efficiently.
Requirement 2
Percentage change in net income = ($232,108 151,705) / $151,705 = 53.00%
Profitability is increasing.
Requirement 3
American Eagle issued a small
amount of common stock in the most recent year.
Requirement 4
. Asset accounts,
such as cash, merchandise inventory, accounts receivable, and property and
equipment, increase with a debit. Liability accounts, such as accounts payable,
accrued rent, and other liabilities, increase with a credit.
accounts, such as common stock and retained earnings, also increase with a credit.
Requirement 5
The terms “debit” and “credit” are not shown in the income statement. Expense
accounts, such as cost of sales and selling, general, and administrative expenses,
increase with a debit. Revenue accounts, such as net revenue, increase with a credit.
The company is getting smaller by asset size but sales are growing. The company may
be using its assets more efficiently.
Requirement 2
Percentage change in net income = ($164,305 151,456) / $151,456 = 8.48%
Net income has increased more than the percentage of sales increase so expenses have
been managed at a stable level.
Requirement 3
Buckle did issue a small amount
of common stock in the most recent year.
Requirement 4
. Asset accounts,
such as cash, inventory, accounts receivable, and property and equipment, increase
with a debit. Liability accounts, such as accounts payable, accrued employee
compensation, and income taxes payable, increase with a credit.
accounts, such as common stock and retained earnings, also increase with a credit.
Requirement 5
The terms “debit” and “credit” are not shown in the income statement. Expense
accounts, such as cost of sales and selling, general, and administrative expenses,
increase with a debit. Revenue accounts, such as net sales, increase with a credit.
Requirement 1
Accounts receivable = $10,930. The accounts receivable account represents the
amount owed to the company by its customers.
Requirement 2
Accounts payable = $21,175. The accounts payable account represents the amount
owed by the company to its suppliers.
Requirement 3
Accrued expenses could include income taxes payable, salaries payable, interest
payable, and rent payable.
Requirement 4
Common stock = $16,422. The common stock account represents capital contributed
to the company by stockholders.
Requirement 5
Assets ($176,064) = Liabilities ($57,854) + Stockholders’ equity ($118,210)
Requirement 6
Net sales = $156,508. The period of net sales is for the year ended September 29,
2012.
Requirement 7
Expenses include cost of sales; research and development; selling, general, and
administrative; and provision for income taxes.
Requirement 8
Yes, the company’s revenues exceed expenses. The difference is net income
($41,733).
Step 6. A trial balance is prepared using the balance of each general ledger account.
Total debits should equal total credits in the trial balance.