The Accounting Information System

Give an example of a transaction that result in:

1. A decrease in asset and a decrease in a liability.
2. A decrease in one asset and an increase in another asset.
3. A decrease in one liability and an increase in another liability.

What are the characteristics of high-quality information in a company’s first IFRS financial statements?

The following trial balance of Watteau Co. does not balance:

Each of the listed accounts should have a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.

1. Cash received from the customer on account was debited for \(570, and accounts receivable was credited for the same amount. The actual collection was for \)750.
2. The purchase of a computer printer on account for \(500 was recorded as a debit to Supplies for \)500 and a credit to Accounts Payable for \(500.
3. Services were performed on account for a client for \)890. Accounts receivable was debited for \(890 and service revenue was credited for \)89.
4. A payment of \(65 for telephone charges was recorded as a debit to Office Expense for \)65 and a debit to Cash for \(65.
5. When the unearned service revenue account was reviewed, it was found that service revenue amounting to \)325 was performed prior to June 30 (related to unearned service revenue).
6. A debit posting to salaries and wages expenses of \(670 was omitted.
7. A payment on account for \)206 was credited to cash for \(206 and credit to account payable for \)260.
8. A dividend of \(575 was debited to salaries and wages expenses for \)575 and credit to cash for $575.

Instruction 

Prepare a correct trial balance. (Note: It may be necessary to add one or more accounts to the trial balance.)

E3-8 (L03) EXCEL (Adjusting Entries) Andy Roddick is the new owner of Ace Computer Services. At the end of August2017, his first month of ownership, Roddick is trying to prepare monthly financial statements. Below is some information relatedto unrecorded expenses that the business incurred during August.1. At August 31, Roddick owed his employees \(1,900 in wages that will be paid on September 1.2. At the end of the month, he had not yet received the month’s utility bill. Based on past experience, he estimated the billwould be approximately \)600.3. On August 1, Roddick borrowed \(30,000 from a local bank on a 15-year mortgage. The annual interest rate is 8%.4. A telephone bill in the amount of \)117 covering August charges is unpaid at August 31.InstructionsPrepare the adjusting journal entries as of August 31, 2017, suggested by the information above.

Do the following events represent business transactions?

Explain your answer in each case

1. A computer is purchased on account.
2. A customer returns merchandise and is given credit on account.
3. A prospective employee is interviewed
4. The owner of the business withdraws cash from the business for personal use.
5. Merchandise is ordered for delivery next month.

Name the accounts debited and credited for each of the following transactions.

1. Billing a customer for work done.
2. Receipt of cash from customer on account.
3. Purchase of office supplies on account.
4. Purchase of 15 gallons of gasoline for the delivery of truck.

Why are revenue and expense accounts called temporary or nominal accounts?

Andrea Pafko, a fellow student, contends that the double-entry system means that each transaction must be recorded twice. Is Andrea correct? Explain.

Is it necessary that a trial balance be taken periodically? What purpose does it serve?

Indicate whether each of the following items is a real or nominal account and whether it appears in the balance sheet or the income statement. 

(a) Prepaid Rent. 

(b) Salaries and Wages Payable. 

(c) Inventory. 

(d) Accumulated Depreciation—Equipment. 

(e) Equipment. 

(f) Service Revenue. 

(g) Salaries and Wages Expense. 

(h) Supplies.

Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain.

(a) How are the components of revenues and expenses different for a merchandising company? (b) Explain the income measurement process for a merchandising company.

What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts?

a) Accounts payable 

b) Expense accounts

c) Revenue accounts 

d) Retained Earnings account

e) Cash

What are adjusting entries and why are they necessary?

What are closing entries and why are they necessary?

Jay Hawk, maintenance supervisor for Boston Insurance Co., has purchased a riding lawnmower and accessories to be used in maintaining the ground and corporate headquarters. He has sent the following information to the accounting department.

Compute the amount of depreciation expense(related to the mover and accessories) that should be reported on Boston’s December 31, 2017, Income Statement. Assume straight-line depreciation.

Midwest Enterprises made the following entry on December 31, 2017.

Interest Expense                   10,000

Interest Payable                    10,000

(To record interest expense due on loan from Anaheim                                         

National Bank)

What entry would Anaheim National Bank make regarding its outstanding loan to Midwest Enterprises? Explain why this must be the case.

Distinguish between cash-basis accounting and accrual-basis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?

BE3-1 (L02) Transactions for Mehta Company for the month of May are presented below. Prepare journal entries for each of these transactions. (You may omit explanations.) May 1 B.D. Mehta invests \(4,000 cash in exchange for common stock in a small welding corporation. 3 Buys equipment on account for \)1,100. 13 Pays \(400 to landlord for May rent. 21 Bills Noble Corp. \)500 for welding work done

Agazzi Repair Shop had the following transactions during the first month of business as a proprietorship. Journalize the transactions. (Omit explanations.) Aug. 2 Invested \(12,000 cash and \)2,500 of equipment in the business. 7 Purchased supplies on account for \(500. (Debit asset account.) 12 Performed services for clients, for which \)1,300 was collected in cash and \(670 was billed to the clients. 15 Paid August rent \)600. 19 Counted supplies and determined that only $270 of the supplies purchased on August 7 are still on hand.

Question: What are reversing entries, and why are they used?

BE3-3 (L02,3) On July 1, 2017, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co., journalize the entry on July 1 and the adjusting entry on December 31

BE3-4 (L02,3) Using the data in BE3-3, journalize the entry on July 1 and the adjusting entry on December 31 for Zubin Insurance Co. Zubin uses the accounts Unearned Service Revenue and Service Revenue.

BE3-5 (L02,3) Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years’ insurance coverage. Prepare P&G’s February 1 journal entry and the annual adjusting entry on June 30.

LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $2,400 received in advance. Prepare LaBouche’s November 1 journal entry and the December 31 annual adjusting entry.

(LO2,3) Dresser Company’s weekly payroll, paid on Fridays, totals \(8,000. Employees work 5-days week. Prepare Dresser’s adjusting entry on Wednesday, December 31, and the journal entry to record the \)8,000 cash payment on Friday, January 2.

Included in Gonzalez Company’s December 31 trial balance is a note receivable of \(12,000. The note is a 4-month, 10% note dated October 1. Prepare Gonzalez’s December 31 adjusting entry to record \)300 of accrued interest, and the February 1 journal entry to record receipt of $12,400 from the borrower.

BE3-9 (L03) Prepare the following adjusting entries at August 31 for Walgreens. (a) Interest on notes payable of \(300 is accrued. (b) Services performed but unbilled total \)1,400. (c) Salaries and wages earned by employees of \(700 have not been recorded. (d) Bad debt expense for year is \)900. Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable, Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt Expense.

BE3-10 (L03) At the end of its first year of operations, the trial balance of Alonzo Company shows Equipment \(30,000 and zero balances in Accumulated Depreciation—Equipment and Depreciation Expense. Depreciation for the year is estimated to be \)2,000. Prepare the adjusting entry for depreciation at December 31, and indicate the balance sheet presentation for the equipment at December 31.

BE3-11 (L04) Side Kicks has year-end account balances of Sales Revenue \(808,900, Interest Revenue \)13,500, Cost of Goods Sold \(556,200, Administrative Expenses \)189,000, Income Tax Expense \(35,100, and Dividends \)18,900. Prepare the year-end closing entries

BE3-12 (L07) Kelly Company had cash receipts from customers in 2017 of \(142,000. Cash payments for operating expenses were \)97,000. Kelly has determined that at January 1, accounts receivable was \(13,000, and prepaid expenses were \)17,500. At December 31, accounts receivable was \(18,600, and prepaid expenses were \)23,200. Compute (a) service revenue and (b) operating expenses.

BE3-13 (L08) Assume that Best Buy made a December 31 adjusting entry to debit Salaries and Wages Expense and credit Salaries and Wages Payable for \(4,200 for one of its departments. On January 2, Best Buy paid the weekly payroll of \)7,000. Prepare Best Buy’s (a) January 1 reversing entry; (b) January 2 entry (assuming the reversing entry was prepared); and (c) January 2 entry (assuming the reversing entry was not prepared).

When salaries and wages expense for the year is computed, why are beginning accrued salaries and wages subtracted from, and ending accrued salaries and wages added to, salaries and wages paid during the year?

List two types of transactions that would receive differentaccountingtreatments using (a) strict cash basis accounting, and (b) a modified cash basis.

“A worksheet is a permanent accounting record, and its use is required in the accounting cycle. “Do you agree? Explain.

E3-1 (L02) (Transaction Analysis—Service Company) Beverly Crusher is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred.April 2 Invested \(32,000 cash and equipment valued at \)14,000 in the business.2 Hired an administrative assistant at a salary of \(290 per week payable monthly.3 Purchased supplies on account \)700. (Debit an asset account.)7 Paid office rent of \(600 for the month.11 Completed a tax assignment and billed client \)1,100 for services rendered. (Use Service Revenue account.)12 Received \(3,200 advance on a management consulting engagement.17 Received cash of \)2,300 for services completed for Ferengi Co.21 Paid insurance expense \(110.30 Paid administrative assistant \)1,160 for the month.30 A count of supplies indicated that \(120 of supplies had been used.30 Purchased a new computer for \)6,100 with personal funds. (The computer will be used exclusively for business purposes.)InstructionsJournalize the transactions in the general journal. (Omit explanations.)

E3-2 (L02) (Corrected Trial Balance) The following trial balance of Wanda Landowska Company does not balance. Yourreview of the ledger reveals the following. (a) Each account had a normal balance. (b) The debit footings in Prepaid Insurance,Accounts Payable, and Property Tax Expense were each understated \(100. (c) A transposition error was made in AccountsReceivable and Service Revenue; the correct balances for Accounts Receivable and Service Revenue are \)2,750 and \(6,690,respectively. (d) A debit posting to Advertising Expense of \)300 was omitted. (e) A \(1,500 cash drawing by the owner was debited to Owner’s Capital and credited to Cash. 

                                                                                   Debit (\))                       Credit (\() Cash \) 4,800Accounts Receivable 2,570Prepaid Insurance 700Equipment \( 8,000Accounts Payable 4,500Property Taxes Payable 560Owner’s Capital 11,200Service Revenue 6,960Salaries and Wages Expense 4,200Advertising Expense 1,100Property Tax Expense 800 

Prepare a correct trial balance.

E3-3 (L02) (Corrected Trial Balance) The following trial balance of Blues Traveler Corporation does not balance. 

TRIAL BALANCE

Cash \( 5,912Accounts Receivable 5,240Supplies 2,967Equipment 6,100Accounts Payable \) 7,044Common Stock 8,000Retained Earnings 2,000Service Revenue 5,200Office Expense 4,320

An examination of the ledger shows these errors.1. Cash received from a customer on account was recorded (both debit and credit) as \(1,380 instead of \)1,830.2. The purchase on account of a computer costing \(3,200 was recorded as a debit to Office Expense and a credit to AccountsPayable.3. Services were performed on account for a client, \)2,250, for which Accounts Receivable was debited \(2,250 and ServiceRevenue was credited \)225.4. A payment of \(95 for telephone charges was entered as a debit to Office Expense and a debit to Cash.5. The Service Revenue account was totaled at \)5,200 instead of $5,280.InstructionsFrom this information prepare a corrected trial balance.

 EXCEL (Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

                                                                                                       Debit            Credit 

Prepaid Insurance                                                                         \(3,600

Supplies                                                                                         \)2,800

Equipment                                                                                     \(25,000

Accumulated Depreciation- Equipment                                                        \)8,400

Notes Payable                                                                                                 \(20,000

Unearned Rent Revenue                                                                                \)9,300

Rent Revenue                                                                                                  \(60,000

Interest Expenses                                                                            -0-

Salaries and Wages Expenses                                                   \)14,000 

An analysis of accounts shows the following.

1. The equipment depreciates \(250 per month.

2. One-third of the unearned rent was recognized as revenue during the quarter.

3. Interest of \)500 is accrued on the notes payable.

4. Supplies on hand total \(850

5. Insurance expires at the rate of \)300 per month.

Instructions

Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expenses, Insurance Expenses, Interest Payable, and Supplies expenses. (Omit Explanations)

E3-6 (L03) (Adjusting Entries) Karen Weller, D.D.S., opened a dental practice on January 1, 2017. During the first month ofoperations, the following transactions occurred.1. Performed services for patients who had dental plan insurance. At January 31, \(750 of such services was performed but notyet billed to the insurance companies.2. Utility expenses incurred but not paid prior to January 31 totaled \)520.3. Purchased dental equipment on January 1 for \(80,000, paying \)20,000 in cash and signing a \(60,000, 3-year note payable.The equipment depreciates \)400 per month. Interest is \(500 per month.4. Purchased a one-year malpractice insurance policy on January 1 for \)12,000.5. Purchased \(1,600 of dental supplies. On January 31, determined that \)500 of supplies were on hand.InstructionsPrepare the adjusting entries on January 31. (Omit explanations.) Account titles are Accumulated Depreciation—Equipment,Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, PrepaidInsurance, Supplies, Supplies Expense, Utilities Expenses, and Accounts Payable.

E3-7 (L03) (Analyze Adjusted Data) A partial adjusted trial balance of Piper Company at January 31, 2017, shows the following.  

ADJUSTED TRIAL BALANCEJANUARY 31, 2017

Debit (\()                       Credit(\))Supplies \( 700Prepaid Insurance 2,400Salaries and Wages Payable \) 800UnearnedService Revenue 750Supplies Expense 950Insurance Expense 400Salaries and Wages Expense 1,800Service Revenue 2,000

InstructionsAnswer the following questions, assuming the year begins January 1.(a) If the amount in Supplies Expense is the January 31 adjusting entry, and \(850 of supplies was purchased in January,what was the balance in Supplies on January 1?(b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for oneyear, what was the total premium and when was the policy purchased?(c) If \)2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2016?(d) If $1,600 was received in January for services performed in January, what was the balance in Unearned Service Revenueat December 31, 2016?

Selected accounts of Urdu Company are shown below.

Instructions 

From an analysis of the T-accounts, reconstruct 

(a) the October transaction entries, and 

(b) the adjusting journal entries that were made on October 31, 2017. Prepare explanations for each journal entry

The adjusted trial balance of Anderson Cooper Co. as of December 31, 2017, contains the following.

Instructions 

(a) Prepare an income statement. 

(b) Prepare a statement of retained earnings. 

(c) Prepare a classified balance sheet.

E3-13 (Lo5,6) (Closing Entries) The adjusted trial balance of Lopez Company shows the following data pertaining to sales at the end of its fiscal year, October 31, 2017: Sales Revenue \(800,000, Delivery Expenses \)12,000, Sales Returns and Allowances \(24,000 and Sales Discounts \)15,000.

Instructions:

(a) Prepare the revenues section of the income statement.

E3-13 (Lo5,6) (Closing Entries) The adjusted trial balance of Lopez Company shows the following data pertaining to sales at the end of its fiscal year, October 31, 2017: Sales Revenue \(800,000, Delivery Expenses \)12,000, Sales Returns and Allowances \(24,000 and Sales Discounts \)15,000.

Instructions:

(b) Prepare separate closing entries for (1) Sales and (2) the contra accounts to sales.

Santo Design was founded by Thomas Grant in January 2011. Presented below is the adjusted trial balance as of December 31, 2017.

Instructions 

a. Prepare an income statement and a statement of retained earnings for the year ending December 31, 2017, and an unclassified balance sheet at December 31. 

b. Answer the following questions.                                                                                                 

1.If the note has been outstanding for 6 months, what is the annual interest rate on that note?                                                                                                                                               

2.If the company paid $17,500 in salaries in 2017, what was the balance in Salaries and Wages Payable on December 31, 2016?

(LO5) (Closing Entries) Presented below is information related to Gonzales Corporation for the month of January 2017.

Cost of Goods sold        \( 208,000        Salaries and wages expenses   \)61,000

Delivery expenses          \( 7,000            Sales discounts                          \) 8,000

Insurance expenses       \( 12,000          Sales returns and allowances   \)13,000

Rent expenses                \( 20,000          Sales revenue                             \)350,000

Instructions:

Prepare the necessary closing entries.

Question: E3-16 (L05) (Closing Entries for a Corporation) Presented below are selected account balances for Homer Winslow Co. as of December 31, 2017.

Inventory 12/31/17       \(60,000                   Cost of Goods Sold            \)225,700

Common Stock           \(75,000                    Selling Expenses                \)16,000

Retained Earnings      \(45,000                    Administrative Expenses   \)38,000

Dividends                    \(18,000                    Income Tax Expenses         \)30,000

Sales Returns and 

Allowances                  \(12,000   

Sales Discounts          \)15,000

Sales Revenue            $410,000

Instructions:

Prepare closing entries for Homer Winslow Co. on December 31,2017. (Omit explanations)

E3-15 (L06) (Missing Amounts) Presented below is financial information for two different companies.

Instructions

Compute the missing amounts.

E3-17 (L02) (Transactions of a Corporation, Including Investment and Dividend) Scratch Miniature Golf and DrivingRange Inc. was opened on March 1 by Scott Verplank. The following selected events and transactions occurred during March.Mar. 1 Invested \(50,000 cash in the business in exchange for common stock.3 Purchased Michelle Wie’s Golf Land for \)38,000 cash. The price consists of land \(10,000, building \)22,000, and equipment\(6,000. (Make one compound entry.)5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of \)1,600.6 Paid cash \(1,480 for a one-year insurance policy.10 Purchased golf equipment for \)2,500 from Singh Company, payable in 30 days.18 Received golf fees of \(1,200 in cash.25 Declared and paid a \)500 cash dividend.30 Paid wages of \(900.30 Paid Singh Company in full.31 Received \)750 of fees in cash.Scratch uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Common Stock,Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.InstructionsJournalize the March transactions. (Provide explanations for the journal entries.)