Exercises: Unit 3

SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS

Questions

➢  Describe the steps in recording and posting the effects of a business transaction.

➢  Give some examples of source documents.

➢  Define an account. What are the two  forms of account posting illustrated in the chapter?

➢  What is meant by the term double-entry procedure, or duality?

➢  Describe how you would determine the balance of a T-account.

➢  Define debit and credit.

➢  Do you think this double entry accounting system makes sense? Can you conceive of other possible methods for recording changes in accounts?

➢  Which of the steps in the accounting cycle are performed throughout the accounting period?

➢  What is the purpose of the Dividends account and how is it increased?

➢  Describe the nature and purposes of the general journal. What does journalizing mean? Give an example of a compound entry in the general journal.

➢  Describe a ledger and a chart of accounts. How do these two compare with a book and its table of contents?

➢  Describe the act of posting.

➢  What types of accounts appear in the unadjusted trial balance? What are the purposes of this trial balance?

➢  You have found that the total of the Debits column of the trial balance of Burns Company is $ 200,000, while the total of the Credits column is $ 180,000. What are some possible causes of this difference? If the difference between the columns is divisible by 9, what types of errors are possible?

➢  Store equipment was purchased for $ 2,000. Instead of debiting the Store Equipment account, the debit was made to Delivery Equipment. Of what help will the trial balance be in locating this error? Why?

➢  A student remembered that the side toward the window in the classroom was the debit side of an account. The student took an examination in a room where the windows were on the other side of the room and became confused and consistently reversed debits and credits. Would the student’s trial balance have equal debit and credit totals? If there were no existing balances in any of the accounts to begin with, would the error prevent the student from preparing correct financial statements? Why?

Exercises

Exercise A  Prepare the journal entry required for each of the following transactions:

  1. Cash was received for services performed for customers, $1,200.
  2. Services were performed for customers on account, $4,200.

Exercise B Prepare the journal entry required for each of the following transactions:

  1. Common stock was issued for $ 100,000.
  2. Purchased machinery for cash, $ 30,000.

Exercise C Prepare the journal entry required for each of the following transactions:

  1. Capital stock was issued for $ 200,000 cash.
  2. A $ 30,000 loan was arranged with a bank. The bank increased the company’s checking account by $ 30,000 after management of the company signed a written promise to return the $ 30,000 in 30 days.
  3. Cash was received for services performed for customers, $ 700.
  4. Services were performed for customers on account, $ 1,200.

Exercise D For each of the following unrelated transactions, give the journal entry to record the transaction. Then show how the journal entry would be posted to T-accounts. You need not include explanations or account numbers.

  1. Capital stock was issued for $ 100,000 cash.
  2. Salaries for a period were paid to employees, $ 24,000.
  3. Services were performed for customers on account, $ 40,000.

Exercise E  Prepare journal entries to record each of the following transactions for Sanchez Company. Use the letter of the transaction in place of the date. Include an explanation for each entry.

  1. Capital stock was issued for cash, $ 300,000.
  2. Purchased trucks by signing a note bearing no interest, $ 210,000.
  3. Earned service revenue on account, $ 4,800.
  4. Collected the account receivable resulting from transaction (c), $ 4,800.
  5. Paid the note payable for the trucks purchased, $ 210,000.
  6. Paid utilities for the month in the amount of $ 1,800.
  7. Paid salaries for the month in the amount of $ 7,500.
  8. Incurred supplies expenses on account in the amount of $ 1,920.
  9. Purchased another truck for cash, $ 48,000.
  10. Performed delivery services on account, $ 24,000.

Exercise F Using the data in the previous problem, post the entries to T-accounts. Write the letter of the transaction in the account before the dollar amount. Determine a balance for each account.

Exercise G Using your answer for the previous exercise, prepare a trial balance. Assume the date of the trial balance is March 31.

Problems

Problem A The transactions of Lightning Package Delivery Company for March follow:

Mar. 1 The company was organized and issued capital stock for $ 300,000 cash.

2 Paid $ 6,000 as the rent for March on a completely furnished building.

5 Paid cash for delivery trucks, $ 180,000.

6 Paid $ 4,000 as the rent for March on two forklift trucks.

9 Paid $ 2,200 for supplies received and used in March.

12 Performed delivery services for customers who promised to pay $ 27,000 at a later date.

20 Collected cash of $ 4,500 from customers on account (see March 12 entry).

21 Received a bill for $ 1,200 for advertising in the local newspaper in March.

27 Paid cash for gas and oil consumed in March, $ 450.

31 Paid $ 2,400 salaries to employees for March.

31 Received an order for services at $ 12,000. The services will be performed in April.

31 Paid cash dividend, $ 1,000.

Prepare the journal entries required to record these transactions in the general journal of the company.

Problem B Economy Laundry Company had the following transactions in August:

Aug. 1 Issued capital stock for cash, $ 150,000.

3 Borrowed $ 40,000 from the bank on a note.

4 Purchased cleaning equipment for $ 25,000 cash.

6 Performed services for customers who promised to pay later, $ 16,000.

7 Paid this month’s rent on a building, $ 2,800.

10 Collections were made for the services performed on August 6, $ 3,200.

14 Supplies were purchased on account for use this month, $ 3,000.

17 A bill for $ 400 was received for utilities for this month.

25 Laundry services were performed for customers who paid immediately, $ 22,000.

31 Paid employee salaries, $ 6,000.

31 Paid cash dividend, $ 2,000.

Required:

  1. Prepare journal entries for these transactions.
  2. Post the journal entries to T-accounts. Enter the account number in the Posting Reference column of the journal as you post each amount. Use the following account numbers:
Acct.
No. Account Title
100 Cash
103 Accounts receivable
170 Equipment
200 Accounts payable
201 Notes payable
300 Capital stock
320 Dividends
400 Service revenue
507 Salaries expense
511 Utilities expense
515 Rent expense
518 Supplies expense

3.  Prepare a trial balance as of August 31.

Problem C Clean-Sweep Janitorial, Inc., a company providing janitorial services, was organized July 1. The following account numbers and titles constitute the chart of accounts for the company:

Acct.
No. Account Title
100 Cash
103 Accounts receivable
150 Trucks
160 Office equipment
170 Equipment
200 Accounts payable
201 Notes payable
300 Capital stock
310 Retained earnings
320 Dividends
400 Service revenue
506 Gas and oil expense
507 Salaries expense
511 Utilities expense
512 Insurance expense
515 Rent expense
518 Supplies expense

July 1 The company issued $ 600,000 of capital stock for cash.

5 Office space was rented for July, and $ 5,000 was paid for the rental.

8 Desks and chairs were purchased for the office on account, $ 28,800.

10 Equipment was purchased for $ 50,000; a note was given, to be paid in 30 days.

15 Purchased trucks for $ 150,000, paying $ 120,000 cash and giving a 60-day note to the dealer for $ 30,000.

July 18 Paid for supplies received and already used, $ 2,880.

23 Received $ 17,280 cash as service revenue.

27 Insurance expense for July was paid, $ 4,500.

30 Paid for gasoline and oil used by the truck in July, $ 576.

31 Billed customers for janitorial services rendered, $ 40,320.

31 Paid salaries for July, $ 51,840.

31 Paid utilities bills for July, $ 5,280.

31 Paid cash dividends, $ 9,600.

  1. Journalize the transactions given for July in the general journal.
  2. Post the journal entries to ledger accounts.
  3. Prepare a trial balance as of  July 31.

Problem D Trim Lawn, Inc., is a lawn care company. Thus, the company earns its revenue from sending its trucks to customers’ residences and certain commercial establishments to care for lawns and shrubbery. Trim Lawn’s trial balance at the end of the first 11 months of the year follows:

  TRIM LAWN, INC.    
  Trial Balance    
  November 30    
Acct.      
No. Account Title Debits Credits
100 Cash $ 63,740  
103 Accounts Receivable 88,600  
150 Trucks 102,900  
160 Office Furniture 8,400  
200 Accounts Payable   $ 33,600
300 Capital Stock   30,000
310 Retained Earnings, 2010 January 1   30,540
400 Service Revenue   371,010
505 Advertising Expense 18,300  
506 Gas an d Oil Expense 21,900  
507 Salaries Expense 65,850  
511 Utilities Expense 2,310  
515 Rent Expense 15,000  
518 Supplies Expense 75,600  
531 Entertainment Expense 2,550  
    $465,150 $465,150

Dec. 2 Paid rent for December, $ 3,000.

5 Paid the accounts payable of $ 33,600.

8 Paid advertising for December, $ 1,500.

10 Purchased a new office desk on account, $ 1,050.

13 Purchased $ 240 of supplies on account for use in December.

15 Collected cash from customers on account, $ 75,000.

20 Paid for customer entertainment, $ 450.

24 Collected an additional $ 6,000 from customers on account.

26 Paid for gasoline used in the trucks in December, $ 270.

28 Billed customers for services rendered, $ 79,500.

30 Paid for more December supplies, $ 12,000.

31 Paid December salaries, $ 15,300.

31 Paid a $ 4,000 cash dividend. (The Dividends account is No. 320.)

  1. Prepare entries in the general journal for the preceding transactions for December.
  2. Post the journal entries to three-column general ledger accounts.
  3. Prepare a trial balance as of  December 31.

Problem E Marc Miller prepared the following trial balance from the ledger of the Quick-Fix TV Repair Company. The trial balance did not balance.

  QUICK-FIX REPAIR COMPANY    
  Trial Balance    
  December 31    
Acct.      
No. Account Title Debits Credits
100 Cash $ 69,200  
103 Accounts Receivable 60,800  
160 Office Furniture 120,000  
172 Office Equipment 48,000  
200 Accounts Payable   $ 32,400
300 Capital Stock   180,000
310 Retained Earnings   80,000
320 Dividends 28,800  
400 Service Revenue   360,000
507 Salaries Expense 280,000  
515 Rent Expense 40,000  
568 Miscellaneous Expense 7,200  
    $654,000 $652,400

The difference in totals in the trial balance caused Miller to carefully examine the company’s accounting records. In searching back through the accounting records, Miller found that the following errors had been made:

  • One entire entry that included a $ 10,000 debit to Cash and a $ 10,000 credit to Accounts Receivable was never posted.
  • In computing the balance of the Accounts Payable account, a credit of $ 3,200 was omitted from the computation.
  • In preparing the trial balance, the Retained Earnings account balance was shown as $ 80,000. The ledger account has the balance at its correct amount of $ 83,200.
  • One debit of $ 2,400 to the Dividends account was posted as a credit to that account.
  • Office equipment of $ 12,000 was debited to Office Furniture when purchased.

Prepare a corrected trial balance for the Quick-Fix TV Repair Company as of December 31. Also, write a description of the effect(s) of each error.

Alternate problems

Alternate problem A Speedy Laundry Company, Inc., entered into the following transactions in August:

Aug. 1 Received cash for capital stock issued to owners, $ 400,000.

3 Paid rent for August on a building and laundry equipment rented, $ 3,000.

6 Performed laundry services for $ 2,000 cash.

8 Secured an order from a customer for laundry services of $ 7,000. The services are to be performed next month.

13 Performed laundry services for $ 6,300 on account for various customers.

15 Received and paid a bill for $ 430 for supplies used in operations.

23 Cash collected from customers on account, $ 2,600.

31 Paid $ 2,400 salaries to employees for August.

31 Received the electric and gas bill for August, $ 385, but did not pay it at this time.

31 Paid cash dividend, $ 1,000.

Prepare journal entries for these transactions in the general journal.

Alternate problem B The transactions listed below are those of Reliable Computer Repair, Inc., for April:

Apr. 1 Cash of $ 500,000 was received for capital stock issued to the owners.

3 Rent was paid for April, $ 3,500.

6 Trucks were purchased for $ 56,000 cash.

7 Office equipment was purchased on account from Wagner Company for $ 76,800.

14 Salaries for first two weeks were paid, $ 12,000.

15 $ 28,000 was received for services performed.

18 An invoice was received from Roger’s Gas Station for $ 400 for gas and oil used during April.

23 A note was arranged with the bank for $ 80,000. The cash was received, and a note promising to return the $ 80,000 on 2010 May 30, was signed.

29 Purchased trucks for $ 73,600 by signing a note.

30 Salaries for the remainder of April were paid, $ 14,400.

  1. Prepare journal entries for these transactions.
  2. Post the journal entries to T-accounts. Enter the account number in the Posting Reference column of the journal as you post each amount. Use the following account numbers:
Acct.
No. Account Title
100 Cash
150 Trucks
172 Office equipment
200 Accounts payable
201 Notes payable
300 Capital stock
400 Service revenue
506 Gas and oil expense
507 Salaries expense
515 Rent expense

3.  Prepare a trial balance as of  April 30.

Alternate problem C Rapid Pick Up & Delivery, Inc., was organized January 1. Its chart of accounts is as follows:

Acct.
No. Account title
100 Cash
103 Accounts receivable
150 Trucks
160 Office furniture
172 Office equipment
200 Accounts payable
201 Notes payable
300 Capital stock
310 Retained earnings
400 Service revenue
506 Gas and oil expense
507 Salaries expense
511 Utilities expense
512 Insurance expense
515 Rent expense
530 Repairs expense

Jan. 1 The company received $ 560,000 cash and $ 240,000 of office furniture in exchange for $ 800,000 of capital stock.

2 Paid garage rent for January, $ 6,000.

4 Purchased computers on account, $ 13,200.

6 Purchased delivery trucks for $ 280,000; payment was made by giving cash of $ 150,000 and a 30-day note for the remainder.

Jan 12 Purchased insurance for January on the delivery trucks. The cost of the policy, $ 800, was paid in cash.

15 Received and paid January utilities bills, $ 960.

15 Paid salaries for first half of January, $ 3,600.

17 Cash received for delivery services to date amounted to $ 1,800.

20 Received bill for gasoline purchased and used in January, $ 180.

23 Purchased delivery trucks for cash, $ 108,000.

25 Cash sales of delivery services were $ 2,880.

27 Purchased a copy machine on account, $ 3,600.

31 Paid salaries for last half of January, $ 4,800.

31 Sales of delivery services on account amounted to $ 11,400.

31 Paid for repairs to a delivery truck, $ 1,120.

  1. Prepare general ledger accounts for all these accounts except Retained Earnings. The Retained Earnings account has a beginning balance of zero and maintains this balance throughout the period.
  2. Journalize the transactions given for  January in the general journal.
  3. Post the journal entries to ledger accounts.
  4. Prepare a trial balance as of January 31.

Alternate problem 4 The trial balance of California Tennis Center, Inc., at the end of the first 11 months of its fiscal year follows:

  CALIFORNIA TENNIS CENTER, INC.  
   Trial Balance    
  November 30    
Acct.      
No. Account Title Debits Credits
100 Cash $71,180  
103 Accounts Receivable 81,750  
130 Land 60,000  
200 Accounts Payable   $18,750
201 Notes Payable   15,000
300 Capital Stock   50,000
310 Retained Earnings, 2010 January 1   53,700
413 Membership and Lesson Revenue   202,500
505 Advertising Expense 21,000  
507 Salaries Expense 66,000  
511 Utilities Expense 2,100  
515 Rent Expense 33,000  
518 Supplies Expense 2,250  
530 Repairs Expense 1,500  
531 Entertainment Expense 870  
540 Interest Expense 300  
    $339,950 $339,950

Dec. 1 Paid building rent for December, $ 4,000.

2 Paid vendors on account, $ 18,000.

5 Purchased land for cash, $ 10,000.

7 Sold memberships on account for December, $ 27,000.

10 Paid the note payable of $ 15,000, plus interest of $ 150.

13 Cash collections from customers on account, $ 36,000.

19 Received a bill for repairs, $ 225.

24 Paid the December utilities bill, $ 180.

28 Received a bill for December advertising, $ 1,650.

29 Paid the equipment repair bill received on the 19th, $ 225.

30 Gave tennis lessons for cash, $ 4,500.

30 Paid salaries, $ 6,000.

30 Sales of memberships on account since December 7, $ 18,000 (for the month of December).

30 Costs paid in entertaining customers in December, $ 350.

30 Paid dividends of $ 1,500. (The Dividends account is No. 320.)

  1. Prepare entries in the general journal for the transactions during December.
  2. Post the journal entries to ledger accounts.
  3. Prepare a trial balance as of December 31.

Alternate problem E Bill Baxter prepared a trial balance for Special Party Rentals, Inc., a company that rents tables, chairs, and other party supplies. The trial balance did not balance. The trial balance he prepared was as follows:

    SPECIAL PARTY RENTALS, INC.    
    Trial Balance    
    December 31    
Acct.        
No.   Account Title Debits Credits
100 Cash   $ 74,000  
103 Accounts Receivable   50,800  
170 Equipment   160,000  
200 Accounts Payable     $ 34,000
300 Capital Stock     130,000
310 Retained Earnings     44,000
320 Dividends   16,000  
400 Service Revenue     432,000
505 Advertising Expense   1,200  
507 Salaries Expense   176,000  
511 Utilities Expense   44,800  
515 Rent Expense   64,000  
      $ 586,800 $ 640,000

In trying to f ind out why the trial balance did not balance, Baxter discovered the following errors:

Equipment was understated (too low) by $ 12,000 because of an error in addition in determining the balance of that account in the ledger.

A credit of $ 4,800 to Accounts Receivable in the journal was not posted to the ledger account at all.

A debit of $ 16,000 for a semiannual dividend was posted as a credit to the Capital Stock account.

The balance of $ 12,000 in the Advertising Expense account was entered as $ 1,200 in the trial balance.

Miscellaneous Expense (Account No. 568), with a balance of $ 3,200, was omitted from the trial balance.

Prepare a corrected trial balance as of 2010 December 31. Also, write a description of the effect(s) of each error.

Beyond the numbers—Critical thinking

Business decision case A John Jacobs lost his job as a carpenter with a contractor when a recession hit the construction industry. Jacobs had been making $ 50,000 per year. He decided to form his own company, Jacobs Corporation, and do home repairs.

The following is a summary of the transactions of the business during the first three months of operations in 2010:

Jan. 15 Stockholders invested $ 40,000 in the business.

Feb. 25 Received payment of $ 4,400 for remodeling a basement into a recreation room. The homeowner purchased all of the building materials.

Mar. 5 Paid cash for an advertisement that appeared in the local newspaper, $ 150.

Apr. 10 Received $ 7,000 for converting a room over a garage into an office for a college professor. The professor purchased all of the materials for the job.

11 Paid gas and oil expenses for automobile, $ 900.

12 Miscellaneous business expenses were paid, $ 450.

15 Paid dividends of $ 2,000.

  1. Prepare journal entries for these transactions.
  2. Post the journal entries to T-accounts.
  3. How profitable is this new venture? Should Jacobs stay in this business?

Annual report analysis B Refer to the Annual Report of The Limited, Inc. in the Annual Report Appendix. Perform horizontal and vertical analyses of the liabilities and stockholder’s equity sections of the balance sheets for the two most recent years shown. Horizontal analysis involves showing the dollar amount and percentage increase or decrease of the latest year over the preceding year amounts. Vertical analysis involves showing the percentage of total liabilities and stockholder’s equity that each account represents as of the balance sheet dates. Write comments on any important changes between the two years that are evidence of decisions made by management.

Annual report analysis C In The Home Depot’s recent Annual Report, the following passages appear:

The primary key to our success is our 39,000 employees who wear those orange aprons you see in our stores.

Few great achievements—in business or in any aspect of life—are reached and sustained without the support and involvement of large numbers of people committed to shared values and goals they deem worthy. Indeed, one need look no further than the business section of the morning newspaper to read of how yet another “blue chip” American business, entrenched in and isolated by its own bureaucracy, has lost the support of its employees and customers…

Frankly, the biggest difference between The Home Depot and our competitors is not the products on our shelves, it is our people and their ability to forge strong bonds of loyalty and trust with our customers…

…Contrary to conventional management wisdom, those at the top of organization charts are not the source of all wisdom. Many of our best ideas come from the people who work on the sales floor. We encourage our employees to challenge senior management directives if they feel strongly enough about their dissenting opinions…

…We want our people to be themselves and to be bold enough to apply their talents as individuals. Certainly, people can often perceive great risk acting this way. Thus, we go to great lengths to empower our employees to be mavericks, to express differences of opinion without fear of being fired or demoted…We do everything we can to make people feel challenged and inspired at work instead of being threatened and made to feel insecure. An organization can, after all, accomplish more when people work together instead of against each other.

Write answers to the following questions:

  1. Do you think The Home Depot management regards its employees more as expenses or assets? Explain.
  2. What does The Home Depot regard as its most valuable asset? Explain your answer.
  3. Is The Home Depot permitted to list its human resources as assets on its balance sheet? Why or why not?
  4. Could its philosophy regarding its employees be the major factor in its outstanding financial performance? Explain.

Ethics case – Writing experience D Refer to “An ethical perspective: Financial deals, Inc.”. Write out the answers to the following questions:

  1. What motivated Larry to go along with unethical and illegal actions? Explain.
  2. What are Larry’s options now? List each possibility.
  3. What would you do if you were Larry? Describe in detail.
  4. What do you think the real Larry did? Describe in detail.

Group project E In teams of two or three students, interview in person or by speakerphone a new staff member who has worked for a CPA firm for only one or two years. Seek information on the advantages and disadvantages of working for a CPA firm. Also, inquire about the nature of the work and the training programs offered by the firm for new employees. As a team, write a memorandum to the instructor summarizing the results of the interview. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Group project F With one or two other students and using library resources, write a report on the life of Luca Pacioli, sometimes referred to as the father of accounting. Pacioli was a Franciscan monk who wrote a book on double-entry accounting in 1494. Be careful to cite sources and treat direct quotes properly. (If you do not know how to do this, ask your instructor.)

Using the Internet—A view of the real world

Visit the following website:

http://www.roberthalf.com

Click on Job Seekers. Read the information and write a memo to your instructor about your search and what you learned about certain jobs in accounting.

Visit the following website:

http://www.sec.gov

Investigate this site for anything of interest. Write a memo to your instructor about your search.