Chapter 3: Exercises

Exercise 2-1: Steps in Analyzing and Recording Transactions The correct order of steps in the accounting process: 1. 2. 3. 4. Analyze each transaction from source documents. Record relevant transactions in a journal. Post journal information to ledger accounts. Prepare and analyze the trial balance. Exercise 2-2: Identifying Source Documents Source documents for each process: 1. Electronic sales receipt: Used when a customer purchases merchandise with a credit card. 2. Supplier bill: Used when NDX purchases goods and receives a bill from the supplier. 3. Bank statement: Used when recording bank fees from a monthly statement. Exercise 2-3: Identifying and Classifying Accounts 1. Balance sheet accounts are arranged into three general categories: assets, liabilities, and equity. 2. The owner’s claim on a company’s assets is called equity. 3. Accounts Payable and Notes Payable are examples of liability accounts. 4. Accounts Receivable, Prepaid Accounts, Supplies, and Land are examples of asset accounts. 5. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Exercise 2-4: Identifying a Ledger and Chart of Accounts 1. A chart of accounts is a list of all accounts a company uses, not including account balances. 2. The general ledger is a record containing all accounts used by a company, including account balances. 3. A source document describes transactions entering an accounting system, such as a purchase order. 4. Increases and decreases in a specific asset, liability, equity, revenue, or expense are recorded in an account. 5. A journal has a complete record of every transaction recorded. Exercise 2-5: Identifying Type and Normal Balances of Accounts 1. Land: Asset, normal balance is debit, increase by debit. 2. Accounts Receivable: Asset, normal balance is debit, increase by debit. 3. Equipment: Asset, normal balance is debit, increase by debit. 4. Cash: Asset, normal balance is debit, increase by debit. 5. Tour Service Revenue: Revenue, normal balance is credit, increase by credit. 6. Notes Payable: Liability, normal balance is credit, increase by credit. 7. Legal Expense: Expense, normal balance is debit, increase by debit. 8. Unearned Revenue: Liability, normal balance is credit, increase by credit. 9. Prepaid Insurance: Asset, normal balance is debit, increase by debit. 10. Services Revenue: Revenue, normal balance is credit, increase by credit. Exercise 2-6: Analyzing Effects of a Compound Entry 1. Analysis of the transaction: o Increase Cash by $10,000. o Increase Equipment by $80,000. o Increase Services Revenue by $62,000. o Decrease Notes Payable by $28,000. 2. Journal Entry: markdown Cash .................................... 10,000 Equipment ............................ 80,000 Notes Payable ................................ 28,000 Services Revenue ............................ 62,000 3. T-Accounts: o Cash: Debit $10,000 o Equipment: Debit $80,000 o Notes Payable: Credit $28,000 o Services Revenue: Credit $62,000 Exercise 2-7: Analyzing Account Entries and Balances 1. Corentine Co.: Cash paid on Accounts Payable during October: o $152,000 (beginning balance) + $281,000 (purchases) − $132,500 (ending balance) = $300,500 paid. 2. Valerian Co.: Credit sales during October: o $89,000 (ending balance) + $102,890 (collections) − $102,500 (beginning balance) = $89,390 in credit sales. 3. Alameda Co.: Cash at the beginning of October: o $18,600 (ending balance) + $103,150 (disbursements) − $102,500 (receipts) = $19,250 cash at the beginning of October. Exercise 2-8: Preparing Journal Entries 1. T. James invested $11,000 cash: markdown Cash ................................... 11,000 Common Stock .......................... 11,000 2. Purchased furniture on credit for $4,000: markdown Furniture .................................. 4,000 Accounts Payable .......................... 4,000 3. Paid $600 for 12-month prepaid insurance: markdown Prepaid Insurance .......................... 600 Cash ............................................ 600 4. Billed customer $3,000 for services: markdown Accounts Receivable .......................... 3,000 Services Revenue ............................. 3,000 5. Paid $4,000 toward furniture payable: markdown Accounts Payable ........................... 4,000 Cash ............................................ 4,000 6. Collected $3,000 for services billed: markdown Cash ........................................... 3,000 Accounts Receivable .......................... 3,000 7. T. James invested additional $10,000: markdown Cash ........................................... 10,000 Common Stock ............................. 10,000 8. Received $5,000 in advance of services: markdown Cash ........................................... 5,000 Unearned Revenue ........................ 5,000 Exercise 2-9: Preparing Journal Entries for Pose-for-Pics 1. Owner investment: markdown Cash .......................................... 6,500 Equipment ................................... 33,500 Common Stock ............................. 40,000 2. Paid $2,100 for insurance: markdown Prepaid Insurance ............................ 2,100 Cash .............................................. 2,100 3. Purchased supplies for $880: markdown Supplies ......................................... 880 Cash .............................................. 880 4. Received $3,331 for photo services: markdown Cash .......................................... 3,331 Services Revenue ............................ 3,331 5. Paid $675 for utilities: markdown Utilities Expense ............................. 675 Cash ............................................. 675