Solutions to Brief Exercises

SOLUTIONS TO BRIEF EXERCISES B. Ex. 3.1 a. 1. Journalize transactions. 2. Post transaction data to the ledger. 3. Prepare a trial balance. 4. Make end-of-period adjustments. 5. Prepare an adjusted trial balance. 6. Prepare financial statements. 7. Journalize and post closing entries. 8. Prepare an after-closing trial balance. b. 1. Evaluate the efficiency of operations. 2. Establish accountability for assets and transactions. 3. Maintain a documentary record of business activities. 4. Help make business decisions. B. Ex. 3.2 Oct. 1 4 12 19 25 30 Cash …………………………………………………… 200,000 Capital Stock …………………………… Issued capital stock at $50 per share. Diagnostic Equipment ………………………………… 75,000 Cash …………………………………… Notes Payable …………………………. Purchased equipment, paying part in cash and signing a note payable for the balance. Accounts Payable ……………………………………… Cash ………………………………….. Paid account payable to Zeller Laboratories. 9,000 Surgical Supplies ……………………………………. Accounts Payable …………………….. Purchased surgical supplies on account. 2,600 Cash ………………………………………………… Accounts Receivable ………………….. Collected amount owed from Health One Insurance. 24,000 Dividends …………………………………………… Cash ………………………………….. Paid cash dividend. 300,000 BE3.1,2 200,000 25,000 50,000 9,000 2,600 24,000 300,000 B. Ex. 3.3 a. Jan. 18 Cash ……………………………………………… 30,000 Capital Stock …………………… Issued capital stock for $30,000. 22 Cash ……………………………………………… Notes Payable …………………… Borrowed $20,000 by issuing a note payable. 23 25 26 31 b. 20,000 20,000 Advertising Expense …………………………… Cash ……………………………… Paid for radio ad to be aired on January 24. 100 Cash…………….. ……………………………… Service Revenue ………………… Provided services to clients. 1,000 Accounts Receivable …………………………… Service Revenue….. ……………… Provided services to clients on account. 2,000 Cash…….. ……………………………………… Accounts Receivable …………… Collected $800 from clients for services performed on January 26. 30,000 100 1,000 2,000 800 800 Jan. 31 Cash balance: $30,000 + $20,000 - $100 + $1,000 + $800 = $51,700 (debit) B. Ex. 3.4 Revenue Expenses Assets Liabilities Owners' Equit y Increases Credits Debits Debits Credits Credits Decreases Debits Credits Credits Debits Debits BE3.3,4 Beginning Retained Earnings (1/1) ……… $ 75,000 Add: Income ($100,000 - $60,000) ………… 40,000 Less: Dividends…………………...………… (5,000) Ending Retained Earnings (1/31)…………… $ 110,000 B. Ex. 3.5 The purchase of land for $20,000 does not affect the balance of Retained Earnings. B. Ex. 3.6 a. Revenue is recognized when it is earned. Thus, KPRM Radio will recognize revenue from Breeze Camp Ground in the months that the ads are aired (at $50 per ad): Revenue $ Ma y 100 $ June 350 $ July 50 b. Expenses are matched to the periods in which they contribute to generating revenue. Thus, Breeze Camp Ground will recognize advertising expense in the months that the ads are aired (at $50 per ad): June July Ma y $ 100 $ 350 $ 50 Ex p ense B. Ex. 3.7 a. An investment by stockholders does not constitute revenue. Although this investment causes an increase in owners' equity, this increase was not earned. It did not result from the rendering of services or sale of merchandise to outsiders. b. The collection of an account receivable does not increase owners' equity and does not represent revenue. c. The borrowing of money from a bank creates a liability; it does not increase the owners' equity and does not represent revenue. d. The interest was earned in May and represents revenue of that month, despite the fact that no withdrawals were made from the bank. e. This fee was earned in May and represents revenue of that month, despite the fact that collection will not be made until June. BE3.5,6,7 B. Ex. 3.8 a. The purchase of a copying machine does not represent an expense. The asset Cash is exchanged for the asset Office Equipment, without any change in owners' equity. The purpose of the transaction was to obtain the use of the copier over a number of years, rather than to generate revenue only during the current period. (Evergreen will recognize depreciation expense on this asset throughout its useful life, but the purchase does not represent an expense in March. Depreciation issues are introduced in Chapter 4.) b. Gasoline purchased is an expense because it is ordinarily used up in the current period. These purchases decrease the owners' equity and are for the purpose of generating revenue. c. Payment to an employee for services rendered in March is a March expense. Such a payment is made to generate revenue and decreases owners' equity. d. The payment to the attorney for services rendered in a prior period reduced an existing liability but did not affect the owners' equity. The payment was not an expense. e. The dividend does not constitute an expense. Unlike payments for advertising, rent, and supplies, dividends do not generate revenue. Dividends constitute a return to stockholders of a portion of their equity in the business. B. Ex. 3.9 Revenue is recognized when it is earned, not necessarily when cash is received. Thus, the airline will recognize revenue of $800,000 in its October income statement (of which $500,000 was collected in September and $300,000 was collected in October). B. Ex. 3.10 Expenses are recognized when they are incurred, not necessarily when cash is paid. Thus, the company will report salary expense of $24,000 in its May income statement (of which $15,000 was paid in May and $9,000 was paid in June). BE3.8,9,10