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1.1 Select the best answer for each of the
following unrelated items
1.d
2. d
3. b
4. d
5. c
6. c
7.d
8.a
9.b
10.b
11c
12b
13c
14d
15
a
Exercise answer for Lesson 1
1.2 SHORT-
ANSWER ESSAY QUESTIONS
ting cycle is an important concept for
accounting. Briefly explain the steps for
accounting cycle.
Solution:
(1)Analyze transactions; (2)
Journalize
transactions; (3) Post to ledger;(4)
Prepare
unadjusted
trial
balance
;(5)
Journalize
&
post
adjustments;
(6)
Prepare
adjusted
trial
balance;
(7)
Prepare
financial
statements;
(8)
Journalize and post closing entries;
(9) Prepare post-closing trial balance
2
Your
roommate,
a
marketing
major,
thinks
that
debit
means
decrease
and
credit
means
increase.
And,
that
every
account can be debited and credited and
as result, every account can have both a debit and
a credit balance. Explain to
your
roommate (1) the meaning of debit and credit; (2)
which accounts can only be debited, which can only
be credited,
and which can be both
debited and credited; and (3) which accounts
normally have debit balances and which credit
balances.
Solution:
The terms debit and credit mean the
left and right side, respectively, of every
account. Some accounts such as
Dividends and Expenses are only
debited; other accounts such as Share Capital-
Ordinary and Revenues are only
credited; and finally, some accounts
such as Cash, Accounts Receivable, and Accounts
Payable can be debited and
credited.
Accounts with debit balances include Assets,
Dividends, and Expenses. Accounts with credit
balances include
Share Capital-Ordinary
and Revenues.
3 A fellow
classmate is confused about how debits and credits
relate to the basic accounting equation. State the
basic
accounting equation, convert it
into the expanded accounting equation, and then
explain how it ties into the rules for
debits and credits.
Solution:
The
basic accounting equation is:
Assets = Liabilities +
Equity
The expanded equation divides
Equity into its various parts, reflecting the
shareholders' investment, dividends,
revenues, and expenses:
Assets = Liabilities + Share Capital-
Ordinary + Retained Earnings
–
Dividends + Revenues
–
Expenses
This
expanded equation can then be re-arranged to
explain why certain accounts have debit (left-
hand) balances, while
other accounts
have credit (right-hand) balances, as follows:
Assets + Dividends + Expenses =
Liabilities + Share Capital-Ordinary + Retained
Earnings + Revenues
The accounts on the
left-hand side of the equation have left-hand, or
debit balances, while the accounts on the
right-hand side of the equation have
right-hand, or credit balances. Accounts with
debit balances are increased with
debits and decreased with credits,
while accounts with credit balances are increased
with credits and decreased with
debits.
4 John Dough, a fellow
employee, wants to understand the basic steps in
the recording process. Identify and briefly
explain the steps in the order in which
they occur.
Solution
The basic steps in the recording
process are:
1.
Analyze each
transaction. In this step, business documents are
examined to determine the effects of the
transaction
on the accounts.
2.
Enter each transaction in
a journal. This step is called journalizing and it
results in making a chronological record of
the transactions.
3.
Transfer journal information to ledger
accounts. This step is called posting. Posting
makes it possible to accumulate
the
effects of journalized transactions on individual
accounts.
1
?
Lesson 1
Financial Accounting I
5 The process of transferring the
information in the journal to the general ledger
is called posting. Explain the posting
process, including the importance of
the journal page number and the account numbers.
Solution
The
posting process begins with locating the
account(s) being debited in the general ledger.
Then entering the date of
the entry,
the journal page number where the entry originated
and debit portion of the entry in the date,
reference and
debit columns,
respectively. Once this done, the account
number(s) of the account(s) being debited is (are)
entered in
the reference column in the
journal. Next, the credit portion of the journal
entry is posted to the appropriate accounts in
the ledger following the same steps as
noted for the debit portion.
The
importance of the journal page number, in the
reference column of each account in the general
ledger accounts, is
to indicate where
to find the original entry. And, the general
ledger account numbers, in the reference column of
the
journal, indicate that the entry
has been posted.
1.3 The
effects of transactions on the accounting equation
Linda Champion began a
professional accounting practice on May 1 and
plans to prepare financial statements at the
end of each month. During May, Champion
completed these transactions:
a.
Invested ?50,000 cash and equipment that had
a
?10,000 fair market (cash
equivalent) value.
b. Paid
?1,600 rent for office space for the
month.
c. Purchased ?12,000
of additional equipment on credit.
d. Completed work for a client and
immediately collected ?2,000 cash.
e. Completed work for a client
a
nd sent a bill for ?7,000 to be paid
within 30 days.
f. Purchased
?8,000 of additional equipment for
cash.
g. Paid an assistant
?2,400 as wages for the month.
h. Collected ?5,000 of the amount owed
by the client described in transaction
(e).
i. Paid for the
equipment purchased in transaction (c).
j. Withdrew ?500 for personal
use.
Enquired:
Using the information presented in (a)
through (j) above, Linda Champion, the owner,
first creates a table like the one
shown below. She then uses the results
to calculate net income earned during the month of
May, her first month of
operations.
Solutions:
2
?
Lesson 1
Financial Accounting I
Notice how Assets of
?64,500 = Liabilities + Owner’s equity of ?64,500.
From this schedule you can
calculate
the firm’s net income by summarizing the revenues
and
expenses as follows: Net income =
Revenues
–
Expenses
= (?2,000 + ?7,000)
–
(?1,600 +
?2,400)
= ?5,000
1.4 Preparing a statement
of comprehensive income and a statement of
financial position
During June through
August of 20X5, Lin Yan earned money doing
computer consulting work. She went around the
city and obtained several contracts for
small jobs. Lin then withdrew ?3,000 from her
personal savings account and
deposited
it in a separate account for the business. At the
end of the summer, Lin tried to figure out how
well her
business had done.
Lin’s business records showed the
following transactions:
a.
Deposited ?12,500 (from customers’
payments).
b. Issued
cheques:
?
car
and equipment rental, ?2,000;
?
gas,
?900;
?
supplies purchased and used,
?100;
?
hir
ed help, ?4,800;
?
payroll taxes,
?600;
?
insurance, ?180;
?
telephone,
?120.
c. Transferred ?2,000
cash from the business bank account to personal
savings account.
d. Owed
?500 by customers.
e. Owed
?150 for gas.
Required
1. Show the effect of each transaction,
including the initial cash deposit, on the
accounting equation.
2. Prepare a
statement of comprehensive income for Lin’s summer
business.
3. Prepare a
statement of financial position for Lin at the end
of the summer.
Solution:
1. To show the effect of each
transaction on the accounting equation, construct
a worksheet with four columns using
the
following headings: item, assets, liabilities, and
owner’s equity. Recall that revenues
increase
owner’s equity and
expenses
decrease
owner’s equity.
3
?
Lesson 1
Financial Accounting I
2. Re
venues originated from
two sources: customers’ payments (?12,500) and
from amounts yet to be paid by
customers (?500). Total expenses
included car and equipment rental (?2,000), car
expenses (?900 paid + ?150 unpaid),
supplies (?100), helpers (?4,800),
payroll taxes (?600), insurance (?180), and
telephone (?120). Net income is
determined from the difference of total
revenues and total expenses. Based on this
information, the following income
statement is prepared.
Solutions:
3.
From the effect of the transactions prepared in
part 1, you can generate the following statement
of financial
position for the end of
the summer.
The cash
balance can be determined as follows:
4
?
Lesson 1
Financial Accounting I
The cash balance
excludes
two amounts: the ?500 still owed to Lin
by customers and ?15
0 she owes for car
gas
invoices not yet paid. If she
receives the money owed her and she pays her debt,
then she will have an additional ?350
(?500 –
?150),
making a total cash balance of ?5,150 (?4,800 +
?350) for the summer. Note that the ?2,000
personal
withdrawal was not
included as an expense on the statement of
comprehensive income. The withdrawal is considered
a
distribution of income (owner’s
profits) rather than an expense. The owner’s
equity of ?5,150 on the balance sheet
includes the initial investment
plus
net income
less
the withdrawal (?3,000
+ ?4,150 –
?2,000).
1.5
Increases, decreases, and
normal balances of accounts
Enquired:
Complete the
following table by
1. Identifying the
type of account listed on each line.
2.
Entering debit or credit in the blank spaces to
identify the kind of entry that would increase or
decrease the account
balance.
3. Identifying the normal balance of
the account.
Account
Types of
Increase
Decrease
Normal
account
balance
Land
Harold Cooper,
Capital
Account receivable
Harold Cooper, Withdrawal
Cash
Equipment
Unearned revenue
Account payable
Postage expense
Prepaid expense
Wages expense
Fees earned
Solution:
5
?
Lesson 1
Financial Accounting I
1.6
Analyzing transactions using T-accounts
Open the following T-accounts: Cash;
Accounts Receivable; Office Supplies; Office
Equipment; Accounts Payable;
Steve
Moore, Capital; Steve Moore, Withdrawals; Fees
Earned; and Rent Expense. Next, record these
transactions of
the Moore Company by
recording the debit and credit entries directly in
the T-accounts. Use the letters beside each
transaction to identify the entries.
a. Steve Moore invested ?12,750 cash in
the business.
b. Purchased
?375 of office supplies for cash.
c. Purchased ?7,050 of office equipment
on credit.
d. Received
?1,500 cash as fees for services provided to a
customer.
e. Paid for the
office equipment purchased in transaction (c).
f. Billed a customer ?2,700 as fees for
services.
g. Paid the
monthly rent with ?525 cash.
h. Collected ?1,125 of the account
receivable created in transaction (f).
i. Steve Moore withdrew ?1,000 cash
from the business.
Enquired:
1. Record these
transactions of the Moore Company in journal.
2. Open the following
T-accounts: Cash; Accounts Receivable; Office
Supplies; Office Equipment; Accounts Payable;
Steve Moore, Capital; Steve Moore,
Withdrawals; Fees Earned; and Rent Expense. Next,
post the entries in the
T-accounts. Use
the letters beside each transaction to identify
the entries.
Solution:
a. Steve Moore invested ?12,750 cash in
the business:
b. Purchased
?375 of office supplies for cash:
c. Purchased ?7,050 of
office equipment on credit:
d. Received ?1,500 cash as fees for
services provided to a customer:
6
?
Lesson 1
Financial Accounting I
e. Paid for the office equipment
purchased in transaction (c):
f. Billed
a customer ?2,700 as fees for services:
g. Paid the monthly rent
with ?525 cash:
h. Collected ?1,125 of the account
receivable created in transaction (f):
i. Steve Moore withdrew
?1,000 cash from the bu
siness:
1.7 Correct the error
Betty Wright, CPA, was
asked by the controller of Gore Company to review
the accounting records before
financial
statements are
prepared. Betty reviewed the records and found
three errors.
paid on accounts payable
for $$930 was recorded as a debit to Accounts
Payable $$390 and a credit to Cash $$390.
purchase
of
supplies
on
account
for
$$500
was
debited
to
Equipment
$$500
and
credited
to
Accounts
Payable
$$500.
company paid
dividends $$1,200. The bookkeeper debited Accounts
Receivable for $$120 and credited Cash $$120.
Enquired:
Prepare an analysis of each error
showing the
(a)
incorrect
entry.
(b)
correct entry.
(c)
correcting entry.
Solution:
1.
(a)
Incorrect Entry
Accounts Payable
.
.................................................
...........................
Cash
.......................
..................................................
..............
2.
(b)
(c)
(a)
(b)
Correct Entry
Accounts Payable
.
.................................................
...........................
Cash
...........
..................................................
..........................
Correcting
Entry
Accounts Payable
.
...............................
.............................................
Cash
.................................................
......................................
Incorrect Entry
Equipment
.
......
..................................................
...............................
Accounts Payable ..........
..................................................
......
Correct Entry
Supplies.....................................
..................................................
.....
Accounts
Payable ..........................................
........................
390
930
540
500
500
390
930
540
500
500
7
?
Lesson 1
Financial Accounting I
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