The Effects of Transactions on Financial Statements

CHAPTER 3 (cont.) Exercise 3-1 Of the items listed in the exercise, the following effects should be included: a. $28,000 increase in a liability account. b. $10,000 increase in the Cash account. e. $62,000 increase in a revenue account. Explanation: This transaction created a $62,000 revenue, which equals the value of the service provided by Lori Fitterling. Payment is received in the form of a $10,000 increase in cash, a $80,000 increase in the computer equipment, and a $28,000 increase in the company’s liabilities. The net value received by the company is $62,000. Exercise 3-5 a. David Joy created a new business and invested $6,000 cash, $7,600 of equipment, and $12,000 in automobile(s). b. Paid $4,800 in advance for insurance coverage. c. Paid $900 cash for office supplies. d. Purchased $300 of office supplies and $9,700 of equipment on credit. e. Received $4,500 cash for delivery services provided. f. Paid $1,600 cash on accounts payable. g. Paid $820 cash for gas and oil expenses. Exercise 3-6 a. Cash ................................................................. Equipment ....................................................... Automobiles .................................................... David Joy, Capital ................................... Owner invested in the business. 6,000 7,600 12,000 b. Prepaid Insurance ........................................... Cash .......................................................... Purchased insurance coverage. 4,800 c. Office Supplies ................................................ Cash .......................................................... Purchased supplies with cash. 900 d. Office Supplies ................................................ Equipment ....................................................... Accounts Payable ................................... 300 9,700 e. Cash ................................................................. Delivery Services Revenue..................... Received cash from customer. 4,500 f. Accounts Payable ........................................... Cash .......................................................... Made cash payment on payables. 1,600 g. Gas and Oil Expense ...................................... Cash .......................................................... Paid for gas and oil expenses. 25,600 4,800 900 10,000 Purchased supplies and equipment on credit. 820 4,500 1,600 820 Exercise 3-9 Aug. 1 20 Total Balance Cash 6,500 Aug. 3,331 9,831 -3,655 6,176 Total Aug. 5 Office Supplies 880 Aug. 1 Prepaid Insurance 2,100 1 5 31 2,100 880 675 3,655 Photography Equipment Aug. 1 33,500 Hannah Hicks, Capital Aug. 1 40,000 Photography Fees Earned Aug. 20 3,331 Aug. 31 Utilities Expense 675 CLICK AND SHOOT Trial Balance August 31 Debit Cash ............................................ $ 6,176 Office supplies ........................... 880 Prepaid insurance...................... 2,100 Photography equipment ........... 33,500 Hannah Hicks, Capital ............... Photography fees earned.......... Utilities expense ........................ 675 Totals .......................................... $43,331 Credit $40,000 3,331 ______ $43,331 Exercise 3-13 Description (1) Difference between Debit and Credit Columns (2) Colum n with the Larger Total (3) Identify account(s) incorrectly stated (4) Amount that account(s) is overstated or understated a. $3,600 debit to Rent Expense is posted as a $1,340 debit. $2,260 credit Rent Expense Rent Expense is understated by $2,260 b. $6,500 credit to Cash is posted twice as two credits to Cash. $6,500 credit Cash Cash is understated by $6,500 c. $10,900 debit to the owner's withdrawals account is debited to owner's capital. $0 –– Owner’s, Capital Owner’s capital account is understated by $10,900 $2,050 debit to Prepaid Insurance is posted as a debit to Insurance Expense. $0 $38,000 debit to Machinery is posted as a debit to Accounts Payable. $0 $5,850 credit to Services Revenue is posted as a $585 credit. $5,265 d. e. f. Owner’s, Withdrawals Owner’s withdrawals is understated by $10,900 –– Prepaid Insurance Insurance Expense –– debit Machinery Prepaid Insurance is understated by $2,050 and Insurance Expense is overstated by $2,050 Accounts Payable Machinery is understated by $38,000 and Accounts Payable is understated by $38,000 Services Revenue Services Revenue is understated by $5,265 g. $1,390 debit to Store Supplies is not posted. $1,390 credit Store Supplies Store Supplies is understated by $1,390