Chapter 3 Review Key
K/U
1. Complete the following sentences by inserting the correct word or words:
a) A financial event changing the value of items on the balance sheet is called a business transaction.
b) Generally, if a business is better off as a result of a transaction, then Capital has increased.
c) After analyzing each transaction, the fundamental accounting equation must still balance.
d) When transactions occur, a minimum of two balance sheet item(s) must change.
e) The accounting department learns of transactions from business papers called source documents.
f) The GAAP that requires transactions to be recorded on the basis of factual evidence is called the objectivity principle.
g) The owner’s withdrawal of cash for personal use reduces Cash and Capital.
2. Indicate the effect each of the following transactions has on the total assets, the total liabilities, or the owner’s
equity, by writing “I” for an increase, “D” for a decrease, or “NC” for no change.
3.
Transaction
a)
b)
c)
d)
e)
Total Assets
Example: A cash payment is made to Ace Supplies, a
creditor.
$400 of supplies are purchased from Paper Servicentre,
but not paid for.
A new truck is purchased from Modern Motors at a
cost of $7 500 with a $2 500 down payment.
$880 cash is received from H. Vernon in part payment
of the amount owed by him.
$750 paid to Vacation Inns in payment of the amount
owed to them.
The owner of the business withdraws $500 cash from
the business funds for his personal use.
f) The owner invested $10 000 cash in her business
g) The business bought equipment for $2 000 cash
h) The business paid one-half of a bill owed to a creditor
i) The business received $2 000 for providing services
j) The owner withdrew $400 from the business for her
personal use
Total Liabilities
Owner’s Equity
D
D
NC
I
I
NC
I
I
NC
NC
NC
NC
D
D
NC
D
NC
D
I
NC
NC
I
NC
NC
D
NC
D
NC
I
NC
I
I
D
3. Partial figures for ABC Company appear below. Fill in the three blanks if liabilities increased by $25 000 in 20-2.
Year
Assets
Liabilities
Equity
20-1
$60 000
$20 000
$40 000
20-2
$90 000
$45 000
$55 000
4. Reynolds Appliance Store, located in Revelstoke, B.C., is owned by Delores Reynolds. On the morning of June 1,
20—, she has the following assets and liabilities.
Assets
Cash
Accounts Receivable
—J. Lam
Equipment
Delivery Truck
Building
$ 4 000
1 500
3 000
12 000
75 000
Liabilities
Accounts Payable
—Ace Supplies
—Pine Motors
$4 000
6 000
a) Set up the assets, liabilities, and Capital on the equation analysis sheet.
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b) Analyze the transactions of June 1, listed below, and record the necessary changes on the equation analysis sheet.
Calculate new balances after each transaction.
c) After completing the transactions, make sure the equation is still in balance. Then prepare a new balance sheet.
Transactions for June 1, 20—
1. A cash payment of $2 000 is made to Ace Supplies.
2. J. Lam makes a cash payment of $800 on his debt.
3. Reynolds performs a service for a customer, J. Cooke, who pays $1 000 for it.
4. A new printer for the office is purchased for $600 cash from Equipment Supply Co.
5. Reynolds invests an additional $2 500 in her business.
6. An old cash register, included in Equipment at a value of $800, is sold for $250 cash.
7. Reynolds has a minor repair made on some equipment. She pays the bill for $150 immediately.
a), b) Reynolds Appliance Store—Equation Analysis Sheet
ASSETS
Cash
Beginning Balances
Transaction 1
New balance
Transaction2
1 500
Equipment
Delivery
Truck
3 000
12 000
Building
75 000
(2 000)
2 000
800
New balance
2 800
Transaction 3
1 000
New balance
3 800
Transaction 4
( 600)
New balance
3 200
Transaction 5
2 500
New balance
5 700
Transaction 6
2
4 000
A/R
J. Lam
LIABILITIES
5 950
Transaction 7
( 150)
Totals
5 800
4 000
A/P Pine
Motors
6 000
85 500
(2 000)
1 500
3 000
12 000
75 000
2 000
6 000
85 500
3 000
12 000
75 000
2 000
6 000
85 500
( 800)
700
1 000
700
3 000
12 000
75 000
2 000
6 000
86 500
12 000
75 000
2 000
6 000
86 500
600
700
3 600
2 500
700
250
New balance
A/P Ace
Supplies
OWNER’S
EQUITY
D. Reynolds
Capital
3 600
12 000
75 000
2 000
6 000
( 800)
700
2 800
89 000
( 550)
12 000
75 000
2 000
6 000
88 450
( 150)
700
2 800
12 000
96 300
96 300
75 000
=
=
2 000
8 000
96 300
6 000
+
88 300
88 300
Reynolds Appliance Store
c)
Balance Sheet
June 1, 20—
Assets
Liabilities
Cash
$ 5 800.00
Accounts Payable
—Ace Supplies
Accounts Receivable
—J. Lam
Building
Equipment
$ 2 000.00
700.00
—Pine Motors
6 000.00
75 000.00
Total Liabilities
$ 8 000.00
2 800.00
Delivery Truck
Owner’s Equity
12 000.00
Total Assets
96 300.00
D. Reynolds, Capital
88 300.00
Total Liabilities and Equity
96 300.00
5. Shown below is an equation analysis sheet for the business of. Examine the entries made on this sheet and list five
transactions that could have caused the changes in financial position.
ACME Auto Repair
ASSETS
A/R
Beginning
Balances
Transaction
1
Transaction2
Transaction
3
Transaction
4
Transaction
5
Totals
Cash
T. Lee
2 000
300
LIABILITIES
A/R
J.
Small
A/P
Supplies
Equipment
Truck
T. Ray
A/P
S.
Satton
500
1 000
5 000
9 000
1 000
4 000
( 500)
1 000
OWNER’S
EQUITY
J. Laforêt
Capital
12 800
0
-
0
-
0
( 500)
0
250
0
1 000
-
0
5 000
12 550
0
500
200
200
( 500)
100
150
( 200)
900
1 200
300
650
1 200
7 200
9 000
1 700
Zero
Proof
1. Equipment is bought for 1000. 500 is paid in cash, 500 will be paid later to T. Ray
2. 200 in Supplies were bought from S. Satton, and will be paid for later
3. 500 cash was take out for personal use
4. A service was performed for J. Small for 250, he paid 100 in cash and will pay the rest later.
5. Equipment was bought for 1200. 200 was paid in cash, and the other 1000 will be paid later.
.
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