Financial accounting information for decisions 6th by john j.
Wild solutions
manual and test bank
Chapter 2
Analyzing
and Recording Transactions
QUESTIONS
1. a. Common
asset accounts: cash, accounts receivable, notes receivable, prepaid expenses
(rent, insurance, etc.), office supplies, store supplies, equipment, building,
and land.
b. Common
liability accounts: accounts payable, notes payable, and unearned revenue,
wages payable, and taxes payable.
c. Common
equity accounts: common stock and retained earnings and dividends.
2. A
note payable is formal promise, usually denoted by signing a promissory note to
pay a future amount. A note payable can be short-term or long-term, depending
on when it is due, and usually carries an interest charge based on amount and
time. An account payable also references an amount owed to an entity. An
account payable can be oral or implied, and often arises from the purchase of
inventory, supplies, or services. An
account payable is usually short-term and not charged interest.
3. There
are several steps in processing transactions: (1) Identify and analyze the
transaction or event, including the source document(s), (2) apply double-entry
accounting, (3) record the transaction or event in a journal, and (4) post the
journal entry to the ledger. These steps
would be followed by preparation of a trial balance and then with the reporting
of financial statements.
4. A
general journal can be used to record any business transaction or event.
5. Debited
accounts are commonly recorded first. The credited accounts are commonly
indented.
6. Expense
accounts have debit balances because they are decreases to equity (and equity
has a credit balance).
7. A
transaction is first recorded in a journal to create a complete record of the
transaction in one place. (The journal
is often referred to as the book of original entry.) This process reduces the likelihood of errors
in ledger accounts.
8. The
recordkeeper prepares a trial balance to summarize the contents of the ledger
and to verify the equality of total debits and total credits. The trial balance also serves as a helpful
internal document for preparing financial statements and other reports.
9. The
error should be corrected with a separate (subsequent) correcting entry. The
entry’s explanation should describe why the correction is necessary.
10. The four financial statements are: income
statement, balance sheet, statement of retained earnings, and statement of cash
flows.
11. The income statement lists the types and
amounts of revenues and expenses, and reports whether the business earned a net
income (also called profit or earnings) or a net loss.
12. An income statement user must know what time
period is covered to judge whether the company’s performance is
satisfactory. For example, a statement
user would not be able to assess whether the amounts of revenue and net income
are satisfactory without knowing whether they were earned over a week, a month,
a quarter, or a year.
13. The balance sheet provides information that
helps users understand a company’s financial position at a point in time. Accordingly, it is often called the statement
of financial position. The balance sheet
lists the types and dollar amounts of assets, liabilities, and equity of the
business.
14. (a) Assets are probable future economic
benefits obtained or controlled by a specific entity as a result of past
transactions or events. (b) Liabilities are probable future sacrifices of
economic benefits arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the future as a result
of past transactions or events. (c)
Equity is the residual interest in the assets of an entity that remains after
deducting its liabilities. (d) Net
assets refer to equity.
15. The balance sheet is sometimes referred to as
the statement of financial position.
16. Debit balance accounts on the Research In
Motion balance sheet include: Cash and cash equivalents; Short-term
investments; Accounts receivable; Other receivables; Inventories; Other current
assets; Deferred income tax asset; Long-term investments; Property, plant and
equipment; Intangible assets; Goodwil; Treasury stock
Credit balance accounts on the Research In
Motion balance sheet include: Accounts payable; Accrued liabilities; Income
taxes payable; Deferred revenue; Deferred income tax liability; Common stock; Additional
paid-in capital; Retained earnings; Accumulated other comprehensive income.
17. The
asset account with receivable in its
account title is: Accounts receivable.
The liability with payable in
its account title is: Accounts payable.
18. Palm’s revenue account is titled “Revenues.”
19.
Nokia calls the asset referring to its merchandise available for sale:
“Inventories.”
Quick
Studies
Quick Study 2-1 (5
minutes)
a. B Balance sheet
b. B Balance sheet
c. I Income statement
d. B Balance sheet
e. B Balance sheet
f. I Income statement
g. B Balance sheet
h. E Statement of retained earnings
i. B Balance sheet
Quick
Study 2-2 (10 minutes)
The
likely source documents include:
a. Bank
statement
b. Sales
ticket
e. Telephone
bill
f. Invoice
from supplier
Quick
Study 2-3 (10 minutes)
|
a.
|
Debit
|
e.
|
Credit
|
i.
|
Credit
|
|
b.
|
Debit
|
f.
|
Debit
|
j.
|
Credit
|
|
c.
|
Credit
|
g.
|
Credit
|
|
|
|
d.
|
Debit
|
h.
|
Credit
|
|
|
Quick Study 2-4 (10
minutes)
|
a.
|
Debit
|
d.
|
Debit
|
g.
|
Debit
|
|
b.
|
Debit
|
e.
|
Debit
|
h.
|
Credit
|
|
c.
|
Credit
|
f.
|
Debit
|
i.
|
Credit
|
Quick Study 2-5 (10
minutes)
|
a.
|
Credit
|
e.
|
Credit
|
i.
|
Debit
|
|
b.
|
Debit
|
f.
|
Debit
|
j.
|
Credit
|
|
c.
|
Debit
|
g.
|
Credit
|
k.
|
Debit
|
|
d.
|
Credit
|
h.
|
Credit
|
l.
|
Debit
|
Quick Study 2-6 (15
minutes)
Jan. 15 Cash.......................................................................... 75,000
Equipment ............................................................... 30,000
Common Stock................................................ 105,000
Owner invests cash and equipment in exchange
for stock.
21 Office
Supplies......................................................... 650
Accounts Payable............................................ 650
Purchased office supplies on credit.
25 Cash.......................................................................... 8,700
Remodeling Services
Revenue...................... 8,700
Received cash for remodeling services.
30 Cash.......................................................................... 4,000
Unearned Remodeling
Services Revenue.... 4,000
Received cash in advance for remodeling
services.
Quick Study 2-7 (10
minutes)
The correct answer is f.
Explanation: If a $2,250
debit to Utilities Expense is incorrectly posted as a credit, the effect is to
understate the Utilities Expense debit balance by $4,500. This causes the Debit column total on the
trial balance to be $4,500 less than the Credit column total.
Quick
Study 2-8 (10 minutes)
|
a.
|
B
|
e.
|
I
|
i.
|
B
|
|
b.
|
I
|
f.
|
I
|
j.
|
I
|
|
c.
|
E
|
g.
|
I
|
k.
|
B
|
|
d.
|
B
|
h.
|
B
|
l.
|
B
|
Quick
Study 2-9 (10 minutes)
a. Accounting under
IFRS follows the same debit and credit system as under US GAAP.
b. The same four
basic financial statements are prepared under IFRS and US GAAP: income
statement, balance sheet, statement of changes in equity, and statement of cash
flows. Although some variations from these titles exist within both systems,
the four basic statements are present.
c. Accounting
reports under both IFRS and US GAAP are likely different depending on the extent
of accounting controls and enforcement. For example, the absence of controls
and enforcement increase the possibility of fraudulent transactions and
misleading financial statements. Without controls and enforcement, all
accounting systems run the risk of abuse and manipulation.
Exercises
Exercise 2-1 (10 minutes)
2 a. Record relevant transactions in a journal.
4 b. Prepare
and analyze the trial balance.
1 c. Analyze each transaction from source
documents.
3 d. Post
journal information to ledger accounts.
Exercise
2-2 (10 minutes)
|
a.
|
5
|
d.
|
2
|
|
b.
|
4
|
e.
|
1
|
|
c.
|
3
|
|
|
Exercise
2-3 (5 minutes)
|
a.
|
1
|
b.
|
2
|
TECH
TODAY
Income
Statement
For
Month Ended August 31
Revenues:
Consulting fees earned......................... $17,000
Expenses:
Salaries expense................................... $8,000
Rent expense......................................... 4,550
Telephone expense............................... 560
Miscellaneous expenses.......................
280
Total expenses...................................... 13,390
Net income.................................................. $ 3,610
Exercise
2-14 (15 minutes)
TECH
TODAY
Statement
of Retained Earnings
For
Month Ended August 31
Retained earnings, August 1..................... $ 0
Add: Net income (from Exercise 2-13)......
3,610
3,610
Less: Cash dividends............................... (3,000)
Retained earnings, August 31................... $ 610
Exercise 2-15 (15 minutes)
TECH TODAY
Balance Sheet
August 31
Assets Liabilities
Cash.............................. $ 8,360 Accounts payable................ ......................... $ 8,000
Accounts receivable..... 17,000 Equity
Office supplies.............. 3,250 Common stock..................... 84,000
Office equipment.......... 18,000 Retained
earnings................ 610*
Land...............................
46,000 Total equity........................... 84,610
Total
assets.................. $92,610 Total liabilities & equity........ .......................... $92,610
* Amount
from Exercise 2-14.
Exercise
2-16 (20 minutes)
|
a.
|
Assets
|
-
|
Liabilities
|
=
|
Equity
|
|
|
Beginning of the
year.....
|
$ 70,000
|
-
|
$30,000
|
=
|
$40,000
|
|
|
End of the year................
|
115,000
|
-
|
46,000
|
=
|
69,000
|
|
|
Net increase in
equity.....
|
|
|
|
|
$29,000
|
|
|
|
|
|
|
|
|
|
|
Net income......................
|
|
|
|
|
$29,000
|
|
Since there were no additional
investments or dividends, the net income for the year equals the net increase
in equity.
|
b. Net increase in equity........................................
|
$29,000
|
|
Add dividends (12 months @ $1,250)..............
|
15,000
|
|
Net income.........................................................
|
$44,000
|
The dividends were added back because they
reduced equity without reducing income.
|
c. Net increase in equity........................................
|
$ 29,000
|
|
|
Less additional investment...............................
|
(45,000)
|
|
|
Net loss..............................................................
|
$(16,000)
|
|
The investment was deducted because it
increased equity without creating income.
|
d. Net increase in equity........................................
|
$29,000
|
|
|
Add dividends (12 months @ $1,250)..............
|
15,000
|
|
|
Gross increase in equity...................................
|
$44,000
|
|
|
|
|
|
|
Less additional investment...............................
|
(25,000)
|
|
|
Net income.........................................................
|
$19,000
|
|
The dividends were added back because
they reduced equity without reducing income and the investments were deducted
because they increased equity without creating income.
Exercise 2-17 (15 minutes)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
 Answers |
$(49,500)
|
|
$72,000
|
|
$73,000
|
|
$(45,000)
|
|
Computations:
|
|
|
|
|
|
|
|
|
Equity, Dec. 31, 2010..........
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
$ 0
|
|
Owner investments....
|
120,000
|
|
72,000
|
|
87,000
|
|
210,000
|
|
Dividends.......
|
(49,500)
|
|
(54,000)
|
|
(10,000)
|
|
(55,000)
|
|
Net income (loss)...............
|
31,500
|
|
81,000
|
|
(4,000)
|
|
(45,000)
|
|
Equity, Dec. 31, 2011..........
|
$102,000
|
|
$99,000
|
|
$73,000
|
|
$110,000
|
Exercise 2-18 (25
minutes)
a. Owner created a new business and invested
$7,000 cash, $5,600 of equipment, and $11,000 in automobile(s) in exchange for
common stock.
b. Paid $3,600 cash in advance for insurance
coverage.
c. Paid $600 cash for office supplies.
d. Purchased $200 of office supplies and $9,400
of equipment on credit.
e. Received $2,500 cash for delivery services
provided.
f. Paid $2,400 cash towards accounts payable.
g. Paid $700 cash for gas and oil.
Exercise
2-19 (30 minutes)
a. Cash........................................................................... 7,000
Equipment.................................................................. 5,600
Automobiles............................................................... 11,000
Common Stock.................................................. 23,600
Owner invested in the business in
exchange for common stock.
b. Prepaid Insurance..................................................... 3,600
Cash.................................................................... 3,600
Purchased insurance coverage.
c. Office Supplies.......................................................... 600
Cash.................................................................... 600
Purchased supplies with cash.
d. Office Supplies.......................................................... 200
Equipment.................................................................. 9,400
Accounts Payable.............................................. 9,600
Purchased supplies and equipment on credit.
e. Cash........................................................................... 2,500
Delivery Services Revenue............................... 2,500
Received cash from customer.
f. Accounts Payable...................................................... 2,400
Cash.................................................................... 2,400
Made payment on payables.
g. Gas and Oil Expense................................................. 700
Cash.................................................................... 700
Paid for gas and oil.
Exercise 2-20 (20 minutes)
|
|
Description |
(1)
Difference between Debit and Credit Columns |
(2)
Column with the Larger Total |
(3)
Identify account(s) incorrectly stated
|
(4)
Amount that account(s) is overstated or understated
|
|
a.
|
$2,400 debit to Rent Expense is posted as a $1,590
debit.
|
$810
|
credit
|
Rent Expense
|
Rent Expense is
understated by $810
|
|
b.
|
$4,050 credit to Cash is posted twice as
two credits to Cash.
|
$4,050
|
credit
|
Cash
|
Cash is
understated by $4,050
|
|
c.
|
$9,900 debit to the Dividends account is debited to Common
Stock.
|
$0
|
––
|
Common Stock
Dividends
|
Common Stock
account is understated by $9,900
Dividends is
understated by $9,900
|
|
d.
|
$2,250 debit to Prepaid Insurance is posted as a debit
to Insurance Expense.
|
$0
|
––
|
Prepaid Insurance
Insurance Expense
|
Prepaid Insurance
is understated by $2,250 and Insurance Expense is overstated by $2,250
|
|
e.
|
$42,000 debit to Machinery is posted as a debit to
Accounts Payable.
|
$0
|
––
|
Machinery
Accounts Payable
|
Machinery is
understated by $42,000 and Accounts Payable is understated by $42,000
|
|
f.
|
$4,950 credit to Services Revenue is posted as a $495
credit.
|
$4,455
|
debit
|
Services Revenue
|
Services Revenue
is understated by $4,455
|
|
g.
|
$1,440 debit to Store Supplies is not posted.
|
$1,440
|
credit
|
Store Supplies
|
Store Supplies is
understated by $1,440
|
Exercise 2-21 (15 minutes)
a. The debit column is correctly stated because
the erroneous debit (to Accounts Payable) is deducted from an account with a
(larger assumed) credit balance.
b. The credit column is understated by $33,900
because of the error in debiting the Accounts Payable account — it should have
been credited.
c. The Office Equipment account is correctly
stated.
d. The Accounts Payable account is understated
by $33,900. It should have been
increased (credited) by $16,950 but the posting error decreased (debited) it by
$16,950.
e. The credit column is $33,900 less than the
debit column, or $326,100 in total ($360,000 - $33,900).
Exercise
2-22 (15 minutes)
|
a.
|
Co.
|
Liabilities
|
/
|
Assets
|
=
|
Debt
Ratio
|
|
Net
Income
|
/
|
Average
Assets
|
=
|
ROA
|
|
|
1
|
$56,000
|
|
$147,000
|
|
0.38
|
|
$21,000
|
|
$200,000
|
|
0.105
|
|
|
2
|
51,500
|
|
104,500
|
|
0.49
|
|
12,000
|
|
70,000
|
|
0.171
|
|
|
3
|
12,000
|
|
90,500
|
|
0.13
|
|
20,000
|
|
100,000
|
|
0.200
|
|
|
4
|
31,000
|
|
92,000
|
|
0.34
|
|
7,500
|
|
40,000
|
|
0.188
|
|
|
5
|
47,000
|
|
64,000
|
|
0.73
|
|
3,800
|
|
40,000
|
|
0.095
|
|
|
6
|
26,500
|
|
32,500
|
|
0.82
|
|
660
|
|
50,000
|
|
0.013
|
b. Company 6 relies most heavily on creditor
(non-owner) financing with 82% of its assets financed by liabilities.
c. Company
3 relies least on creditor (non-owner) financing at only 13%. This implies that 87% of the assets are
financed by equity (owners).
d. The companies with the highest debt ratios
indicate the greatest risk. The two
companies with the highest debt ratios are 5 and 6.
e. Company 3 yields the highest return on assets
at 20%; followed by Company 4 at 18.8%.
f. As an investor, one prefers high returns at
low risk. Company 3 is the preferred
investment since it yields the lowest risk (debt ratio is 13%) and highest
return on assets (20%).
Exercise
2-23 (10 minutes)
BMW
Balance Sheet (in
Euro millions)
December 31, 2009
Assets Equity
and liabilities
Noncurrent assets........ € 6,984 Total
equity........................... €
5,354
Current assets.............. 17,663 Noncurrent
liabilities............ 10,943
Current liabilities............ 8,350
Total assets.................. €24,647 Total equity and liabilities.... .......................... €24,647
Problem sET A
Problem 2-1A (90 minutes)
Part
1
April 1 Cash.......................................................... 101 100,000
Office Equipment...................................... 163 24,000
Common Stock................................. 307 124,000
Owner invested cash and
equipment for stock.
2 Prepaid
Rent............................................. 131 7,200
Cash.................................................. 101 7,200
Prepaid twelve months’
rent.
3 Office
Equipment...................................... 163 12,000
Office Supplies......................................... 124 2,400
Accounts Payable............................. 201 14,400
Purchased equip. &
supplies on credit.
6 Cash.......................................................... 101 2,000
Services Revenue............................ 403 2,000
Received cash for services.
9 Accounts
Receivable............................... 106 8,000
Services Revenue............................ 403 8,000
Billed client for completed
work.
13 Accounts
Payable.................................... 201 14,400
Cash.................................................. 101 14,400
Paid balance due on
account.
19 Prepaid
Insurance.................................... 128 6,000
Cash.................................................. 101 6,000
Paid premium for insurance.
22 Cash.......................................................... 101 6,400
Accounts Receivable....................... 106 6,400
Collected part of amount
owed by client.
25 Accounts
Receivable............................... 106 2,640
Services Revenue............................ 403 2,640
Billed client for completed
work.
28 Dividends.................................................. 319 6,200
Cash.................................................. 101 6,200
Paid cash dividends.
29 Office
Supplies......................................... 124 800
Accounts Payable............................. 201 800
Purchased supplies on
account.
30 Utilities
Expense....................................... 690 700
Cash.................................................. 101 700
Paid monthly utility bill.
Problem
2-1A (Continued)
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