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Chapter 3: Analyzing Business Transactions Using T Accounts
Chapter Opener: Thinking Critically
Students should recognize that sales will increase owner’s equity, or revenue. Both the asset and the
owner’s equity side of the accounting equation are increased by the amount of the sale.
Fast Facts
• Johnson & Johnson was one of Fortune’s 2005 Most Admired Companies.
• As portions of the company grew they were characteristically divided and eventually spun off into
separate subsidiaries. Ortho, which began with one birth control product in the 1930s, became the Ortho
Pharmaceutical Corporation.
• Johnson & Johnson was recognized for having the best corporate reputation in America for the sixth
consecutive year.
• The company is consistently recognized as a top company to work for, and has received numerous
awards from minority organizations.
• Johnson & Johnson’s medical device companies develop, market and sell more medical devices than any
other company in the world.
Computers in Accounting: Thinking Critically
Students’ experience with software applications will vary.
Computers in Accounting: Internet Application
Students should use the search string “accounting software for small business.” They may choose to report
on one of the following applications:
• Peachtree
(www.peachtree.com)
• QuickBooks
(www.quickbooks.com)
• Red Wing Software
(www.redwingsoftware.com)
• Acclaim Software
(www.acclaimsoftware.com)
Managerial Implications: Thinking Critically
Answers will vary but could include the following:
• Cash is overstated and checks bounce.
• The credit rating of the business is affected.
• The business loses customers because payments on account are not recorded properly.
16 䡲 Chapter 3
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Discussion Questions
These questions are designed to check students’ understanding of the new terms, concepts, and procedures
presented in the chapter.
1. Adding the figures on both sides of the account and subtracting the smaller total from the larger total.
2. To provide a classified list of the names and numbers of a firm’s accounts.
3. Order in which they appear on financial statements. Balance sheet accounts listed first, followed by
income statement accounts.
4. Additional accounts can be added when needed.
5. Permanent account balances are carried forward to start a new accounting period. Temporary account
balances are transferred to a summary account at the end of the period and are zero at the start of a
new accounting period.
6. a, b, h, i, k: temporary
c, d, e, f, g, j, l: permanent
7. Written records for all assets, liabilities, and owner’s equity of a business.
8. Payment of rent in advance affords the right to occupy the facility the number of months covered by the
payment.
9. Each transaction produces at least two effects.
10. Debit: entry on the left side of an account. Credit: entry on the right side of an account.
11. a. debit b. credit c. credit d. credit e. debit
Exercises
Exercise 3.1
Cash
Equipment
8,000
16,000
Accounts Payable
Ned Smith, Capital
6,000
18,000
Exercise 3.2
Cash
(1)
(3)
20,000
2,000
(2)
(4)
(5)
Equipment
5,000
700
500
(2)
Fees Income
(3)
Supplies
(5)
500
5,000
Advertising Expense
2,000
(4)
700
Tonya Simpson, Capital
(1)
20,000
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Exercise 3.3
1. Credit, credit, debit
2. Debit, debit, credit
3. Debit, debit, credit
4. Credit, credit, debit
5. Credit, credit, debit
Exercise 3.4
1. Debit
2. Debit
3. Debit
4. Debit
5. Credit
6. Credit
7. Debit
8. Credit
Exercise 3.5
Cash, $63,700, Dr.
Accounts Receivable, $3,000, Dr.
Supplies, $20,000, Dr.
Equipment, $30,000, Dr.
Accounts Payable, $30,000, Cr.
Cecil Hill, Capital, $80,000, Cr.
Cecil Hill, Drawing, $2,000, Dr.
Fees Income, $14,000, Cr.
Salaries Expense, $5,000, Dr.
Telephone Expense, $300, Dr.
Exercise 3.6
ANTIQUE RESTORATIONS
Trial Balance
December 31, 2007
Account Name
Debit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . .
Cecil Hill, Capital . . . . . . . . . . . . . . . . . . . .
Cecil Hill, Drawing . . . . . . . . . . . . . . . . . . .
Fees Income . . . . . . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . . . .
63,700
3,000
20,000
30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124,000
Credit
30,000
80,000
2,000
14,000
5,000
300
124,000
ANTIQUE RESTORATIONS
Income Statement
Month Ended December 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Salaries Expense . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . .
Total Expenses . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
18 䡲 Chapter 3
14,000
5,000
300
5,300
8,700
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Exercise 3.7
ANTIQUE RESTORATIONS
Statement of Owner’s Equity
Month Ended December 31, 2007
Cecil Hill, Capital, December 1, 2007 . . . . . . . . .
Net Income for December . . . . . . . . . . . . . . . . . .
Less Withdrawals for December . . . . . . . . . . . . .
80,000
8,700
2,000
Increase in Capital . . . . . . . . . . . . . . . . . . . . . . .
6,700
Cecil Hill, Capital, December 31, 2007 . . . . . . . .
86,700
ANTIQUE RESTORATIONS
Balance Sheet
December 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 63,700
Accounts Receivable . . . . . . . . . . . . . 3,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . 20,000
Equipment . . . . . . . . . . . . . . . . . . . . . 30,000
Liabilities
Accounts Payable . . . . . . . . . . . . . . . . 30,000
Owner’s Equity
Cecil Hill, Capital . . . . . . . . . . . . . . . . . 86,700
Total Assets . . . . . . . . . . . . . . . . . . . . 116,700
Total Liabilities and Owner’s Equity . . . 116,700
Exercise 3.8
HIDDEN VALLEY COMPANY
Chart of Accounts
Account Number
100-199
101
111
121
131
141
200-299
202
Account Name
ASSETS
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Office Equipment
LIABILITIES
Accounts Payable
Account Number
300-399
301
302
400-499
401
500-599
511
514
517
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Account Name
OWNER’S EQUITY
James Walker, Capital
James Walker, Drawing
REVENUE
Fees Income
EXPENSES
Salaries Expense
Utilities Expense
Telephone Expense
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Problems
Problem 3.1A
Cash
1.
Alma Ware, Capital
+ 10,000
2.
+ 10,000
Shop Equipment
Cash
+ 900
3.
– 900
Store Equipment
Accounts Payable
+ 600
+ 600
Truck
4.
Cash
+ 5,000
5.
– 5,000
Shop Equipment
Alma Ware, Capital
+ 1,500
6.
+ 1,500
Store Equipment
Accounts Payable
+ 1,250
7.
+ 1,250
Cash
Accounts Payable
– 200
8.
Cash
– 200
Alma Ware, Drawing
– 800
+ 800
Analyze: The transactions that affect the Cash account are transactions 1, 2, 4, 7, and 8.
20 䡲 Chapter 3
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Problem 3.2A
1.
Equipment
Cash
+ 8,000
2.
Mandy Alvarez, Drawing
– 8,000
Cash
+ 2,000
3.
Cash
– 2,000
Equipment
+ 1,500
4.
Delivery Truck
– 1,500
Cash
+ 6,000
5.
Accounts Payable
– 6,000
Cash
– 1,800
6.
Office Equipment
– 1,800
Accounts Payable
+ 2,500
7.
Cash
+ 2,500
Charles Beatty, Capital
+ 10,000
8.
Accounts Payable
– 750
+ 10,000
Cash
– 750
Analyze: The transactions that affect the liability accounts are transactions 5, 6, and 8.
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Problem 3.3A
1.
Rent Expense
Page 22
Cash
+ 1,600
2.
Cash
– 1,600
Fees Income
+ 2,000
3.
Salaries Expense
+ 2,000
Cash
+ 2,400
4.
Accounts Receivable
– 2,400
Fees Income
+ 3,600
5.
Telephone Expense
+ 3,600
Cash
+ 300
6.
Cash
– 300
Accounts Receivable
+ 1,000
7.
Cash
– 1,000
Telephone Expense
+ 60
8.
Accounts Receivable
– 60
Fees Income
+ 2,400
9.
Utilities Expense
+ 2,400
Cash
+ 200
10.
Gasoline Expense
– 200
Cash
+ 440
11.
Cash
– 440
Accounts Receivable
+ 1,800
12.
Cash
+ 3,600
– 1,800
Fees Income
+ 3,600
Analyze: The total cash collected on accounts receivable during the month was $2,800.
22 䡲 Chapter 3
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Problem 3.4A
Cash
(a)
(d)
(h)
(m)
(p)
+ 60,000
+ 4,000
+ 2,250
+ 2,375
+ 1,900
Bal.
30,527
(b)
(c)
(e)
(i)
(j)
(k)
(l)
(o)
(r)
(s)
Accounts Receivable
– 3,200
– 18,000
– 800
– 1,800
– 650
– 4,900
– 6,850
– 398
– 400
– 3,000
(f)
(n)
Bal.
Automobile
(c)
+ 18,000
(i)
– 1,800
+ 3,000
+ 3,200
– 2,250
– 1,900
(g)
(k)
(q)
Bal.
(g)
(k)
(q)
Bal.
(d)
(f)
(m)
(n)
Bal.
+ 2,800
+ 4,900
+ 2,720
8,620
(a)
+ 650
+ 60,000
Automobile Expense
+ 4,000
+ 4,575
+ 2,375
+ 2,750
13,700
(e)
(r)
Bal.
Utilities Expense
(j)
+ 2,800
+ 9,800
+ 2,720
15,320
Lisa Morgan, Capital
Fees Income
Rent Expense
(b)
(h)
(p)
Accounts Payable
Lisa Morgan, Drawing
(s)
+ 4,575
+ 2,750
3,175
Office Equipment
+ 800
+ 400
1,200
Salaries Expense
(l)
+ 6,850
Telephone Expense
(o)
+ 398
Analyze: The outstanding amount owed by the company’s credit customers was $3,175.
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Problem 3.5A
LISA MORGAN, ATTORNEY AT LAW
Trial Balance
April 30, 2007
Account Name
Debit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . .
Office Equipment . . . . . . . . . . . . . . . . . . . .
Automobile . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . .
Lisa Morgan, Capital . . . . . . . . . . . . . . . . . .
Lisa Morgan, Drawing . . . . . . . . . . . . . . . . .
Fees Income . . . . . . . . . . . . . . . . . . . . . . . .
Automobile Expense . . . . . . . . . . . . . . . . . .
Rent Expense . . . . . . . . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . . . .
30,527
3,175
15,320
18,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,320
Credit
8,620
60,000
3,000
13,700
1,200
3,200
650
6,850
398
82,320
LISA MORGAN, ATTORNEY AT LAW
Income Statement
Month Ended April 30, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Automobile Expense . . . . . . . . . . . . . . . .
Rent Expense . . . . . . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . .
13,700
1,200
3,200
650
6,850
398
Total Expense . . . . . . . . . . . . . . . . . . .
12,298
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
1,402
LISA MORGAN, ATTORNEY AT LAW
Statement of Owner’s Equity
Month Ended April 30, 2007
Lisa Morgan, Capital, April 1, 2007 . . . . . . .
Net Income for April . . . . . . . . . . . . . . . . . .
Less Withdrawals for April . . . . . . . . . . . . .
60,000
1,402
3,000
Decrease in Capital . . . . . . . . . . . . . . . . . .
1,598
Lisa Morgan, Capital, April 30, 2007 . . . . . .
58,402
24 䡲 Chapter 3
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LISA MORGAN, ATTORNEY AT LAW
Balance Sheet
April 30, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 30,527
Accounts Receivable . . . . . . . . . . . . . 3,175
Office Equipment . . . . . . . . . . . . . . . . 15,320
Automobile . . . . . . . . . . . . . . . . . . . . . 18,000
Liabilities
Accounts Payable . . . . . . . . . . . . . . . .
Owner’s Equity
Lisa Morgan, Capital . . . . . . . . . . . . . . 58,402
Total Assets . . . . . . . . . . . . . . . . . . . . 67,022
Total Liabilities and Owner’s Equity . . . 67,022
8,620
Analyze: The net decrease in owner’s equity during the month of April was $1,598.
Problem 3.1B
1.
Cash
Clifford Marshall, Capital
+ 30,000
2.
+ 30,000
Office Furniture
Cash
+ 8,000
3.
Office Equipment
– 8,000
Accounts Payable
+ 475
4.
+ 475
Automobile
Cash
+ 8,000
5.
Cash
– 8,000
Clifford Marshall, Capital
+ 5,000
6.
Office Equipment
+ 5,000
Accounts Payable
+ 1,500
7.
Accounts Payable
+ 1,500
Cash
– 475
8.
Clifford Marshall, Drawing
+ 2,000
– 475
Cash
– 2,000
Analyze: All transactions affected asset accounts.
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Problem 3.2B
1.
Cash
Page 26
Albert James, Capital
+ 4,000
2.
Equipment
+ 4,000
Cash
+ 3,500
3.
Cash
– 3,500
Office Furniture
+ 300
4.
Office Equipment
– 300
Accounts Payable
+ 675
5.
Office Equipment
+ 675
Accounts Payable
+ 2,550
6.
Brenda Davis, Drawing
+ 2,550
Cash
+ 1,000
7.
Delivery Truck
– 1,000
Accounts Payable
+ 9,000
8.
Accounts Payable
– 550
+ 9,000
Cash
– 550
Analyze: Transactions 1 and 6 directly affect the owner’s equity account.
26 䡲 Chapter 3
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Problem 3.3B
1.
Office Supplies
Cash
+ 1,000
2.
Cash
– 1,000
Fees Income
+ 10,500
3.
Rent Expense
+ 10,500
Cash
+ 2,000
4.
Accounts Receivable
– 2,000
Fees Income
+ 1,500
5.
Cash
+ 1,500
Accounts Receivable
+ 500
6.
Salaries Expense
– 500
Cash
+ 1,800
7.
Telephone Expense
– 1,800
Cash
+ 240
8.
Accounts Receivable
– 240
Fees Income
+ 1,000
9.
Office Supplies
+ 1,000
Accounts Payable
+ 500
10.
Salaries Expense
+ 500
Cash
+ 1,800
11.
Cash
– 1,800
Accounts Receivable
+ 1,000
12.
Cash
+ 4,050
– 1,000
Fees Income
+ 4,050
Analyze: $6,840 in cash was spent in June.
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Problem 3.4B
Cash
((a)
(d)
(h)
(m)
(o)
+ 75,000
+ 3,600
+ 3,250
+ 6,750
+ 3,500
Bal.
55,905
(b)
(c)
(e)
g)
(i)
(k)
(l)
(p)
(q)
(r)
(s)
Accounts Receivable
– 2,500
– 7,860
– 575
– 6,000
– 1,500
– 7,500
– 4,200
– 1,200
– 300
– 560
– 4,000
(f)
(n)
Bal.
Office Equipment
(g) + 18,000
(k) + 15,000
Bal.
33,000
(p)
– 1,200
+ 4,000
+ 560
– 3,250
– 3,500
(c)
(j)
Bal.
+ 7,860
+ 2,400
10,260
Jeraldine Wells, Capital
(g) + 12,000
(j)
+ 2,400
(k)
+ 7,500
Bal.
20,700
(a)
Fees Income
(d)
(f)
(m)
(n)
Bal.
Utilities Expense
(r)
(h)
(o)
Accounts Payable
Jeraldine Wells, Drawing
(s)
+ 6,500
+ 7,500
7,250
Office Furniture
Rent Expense
+ 3,600
+ 6,500
+ 6,750
+ 7,500
24,350
(b)
Salaries Expense
(l)
+ 4,200
+ 75,000
+ 2,500
Telephone Expense
(e)
+ 575
Miscellaneous Expense
(i)
(q)
Bal.
+ 1,500
+ 300
1,800
Analyze: After all transactions have been recorded, the liabilities are $20,700.
28 䡲 Chapter 3
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Problem 3.5B
JERALDINE WELLS, LANDSCAPE CONSULTANT
Trial Balance
June 30, 2007
Account Name
Debit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . .
Office Furniture . . . . . . . . . . . . . . . . . . . . . .
Office Equipment . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . .
Jeraldine Wells, Capital . . . . . . . . . . . . . . .
Jeraldine Wells, Drawing . . . . . . . . . . . . . .
Fees Income . . . . . . . . . . . . . . . . . . . . . . . .
Rent Expense . . . . . . . . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . . . .
Miscellaneous Expense . . . . . . . . . . . . . . .
55,905
7,250
10,260
33,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,050
Credit
20,700
75,000
4,000
24,350
2,500
560
4,200
575
1,800
120,050
JERALDINE WELLS, LANDSCAPE CONSULTANT
Income Statement
Month Ended June 30, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
24,350
Expenses
Rent Expense . . . . . . . . . . . . . . . . . . . . .
2,500
Utilities Expense . . . . . . . . . . . . . . . . . . .
560
Salaries Expense . . . . . . . . . . . . . . . . . .
4,200
Telephone Expense . . . . . . . . . . . . . . . .
575
Miscellaneous Expense . . . . . . . . . . . . .
1,800
Total Expenses . . . . . . . . . . . . . . . . . .
9,635
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
14,715
JERALDINE WELLS, LANDSCAPE CONSULTANT
Statement of Owner’s Equity
Month Ended June 30, 2007
Jeraldine Wells, Capital, June 1, 2007 . . . .
Net Income for June . . . . . . . . . . . . . . . . . .
Withdrawals for June . . . . . . . . . . . . . . . . .
75,000
14,715
(4,000)
Increase in Capital . . . . . . . . . . . . . . . . . . .
10,715
Jeraldine Wells, Capital, June 30, 2007 . . .
85,715
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JERALDINE WELLS, LANDSCAPE CONSULTANT
Balance Sheet
June 30, 2007
Assets
Liabilities
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 55,905
Accounts Payable . . . . . . . . . . . . . . . . 20,700
Accounts Receivable . . . . . . . . . . . . . 7,250
Office Furniture . . . . . . . . . . . . . . . . . 10,260
Owner’s Equity
Office Equipment . . . . . . . . . . . . . . . . 33,000
Jeraldine Wells, Capital . . . . . . . . . . . . 85,715
Total Assets . . . . . . . . . . . . . . . . . . . . 106,415
Total Liabilities and Owner’s Equity . . .106,415
Analyze: The increase in owner’s equity for the month of June is $10,715.
Challenge Problem
Cash
(a)
(d)
(i)
(m)
(p)
+ 30,000
+ 4,200
+ 2,160
+ 2,800
+ 1,200
Bal.
23,960
(b)
(c)
(e)
(g)
(h)
(k)
(l)
(n)
(q)
(r)
Accounts Receivable
– 2,000
– 4,000
– 375
– 175
– 650
– 4,000
– 540
– 560
– 3,500
– 600
(f)
(o)
Bal.
Office Equipment
(g)
+ 575
(l)
– 540
+ 3,500
+ 560
– 2,160
– 1,200
(c)
(j)
Bal.
(g)
(j)
Bal.
(d)
(f)
(m)
(o)
Bal.
+ 400
+ 1,080
940
(a)
+ 4,000
+ 30,000
Advertising Expense
+ 4,200
+ 2,610
+ 2,800
+ 4,200
13,810
(b)
Salaries Expense
(k)
+ 4,000
+ 1,080
5,080
Adele Applegate, Capital
Fees Income
Utilities Expense
(n)
(i)
(p)
Accounts Payable
Adele Applegate, Drawing
(q)
+ 2,610
+ 4,200
3,450
Office Furniture
+ 2,000
Telephone Expense
(e)
+ 375
Miscellaneous Expense
(h)
(r)
Bal.
+ 650
+ 600
1,250
30 䡲 Chapter 3
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ADELE APPLEGATE, ARCHITECT
Trial Balance
January 31, 2007
Account Name
Debit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . .
Office Furniture . . . . . . . . . . . . . . . . . . . . . .
Office Equipment . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . .
Adele Applegate, Capital . . . . . . . . . . . . . .
Adele Applegate, Drawing . . . . . . . . . . . . .
Fees Income . . . . . . . . . . . . . . . . . . . . . . . .
Advertising Expense . . . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . . . .
Miscellaneous Expense . . . . . . . . . . . . . . .
23,960
3,450
5,080
575
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,750
Credit
940
30,000
3,500
13,810
2,000
560
4,000
375
1,250
44,750
ADELE APPLEGATE, ARCHITECT
Income Statement
Month Ended January 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Advertising Expense . . . . . . . . . . . . . . . .
Utilities Expense . . . . . . . . . . . . . . . . . . .
Salaries Expense . . . . . . . . . . . . . . . . . .
Telephone Expense . . . . . . . . . . . . . . . .
Miscellaneous Expense . . . . . . . . . . . . .
13,810
2,000
560
4,000
375
1,250
Total Expenses . . . . . . . . . . . . . . . . . .
8,185
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
5,625
ADELE APPLEGATE, ARCHITECT
Statement of Owner’s Equity
Month Ended January 31, 2007
Adele Applegate, Capital, January 1, 2007
Net Income for January . . . . . . . . . . . . . . .
5,625
Less Withdrawals for January . . . . . . . . . .
3,500
30,000
Increase in Capital . . . . . . . . . . . . . . . . . . .
2,125
Adele Applegate, Capital, January 31, 2007
32,125
ADELE APPLEGATE, ARCHITECT
Balance Sheet
January 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 23,960
Accounts Receivable . . . . . . . . . . . . . 3,450
Office Furniture . . . . . . . . . . . . . . . . . 5,080
Office Equipment . . . . . . . . . . . . . . . .
575
Liabilities
Accounts Payable . . . . . . . . . . . . . . . .
Owner’s Equity
Adele Applegate, Capital . . . . . . . . . . . 32,125
Total Assets . . . . . . . . . . . . . . . . . . . . 33,065
Total Liabilities and Owner’s Equity . . . 33,065
940
Analyze: Assets ($33,065) = Liabilities ($940) + Owner’s Equity ($32,125)
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Critical Thinking Problem
Cash
1,500
300
250
Bal.
Accounts Receivable
500
900
100
250
50
Equipment and Tools
575
500
250
Truck
Oscar Wilson, Capital
900
Fees Income
1,500
Bal.
Salary Expense
Gasoline Expense
250
300
575
250
1,125
Advertising Expense
100
50
SPECIALTY LAWN CARE
Income Statement
Three Months Ended August 31, 2007
Revenue
Fees Income . . . . . . . . . . . . . . . . . . . . . .
Expenses
Salary Expense . . . . . . . . . . . . . . . . . . . .
Gasoline Expense . . . . . . . . . . . . . . . . . .
Advertising Expense . . . . . . . . . . . . . . . .
1,125
250
100
50
Total Expenses . . . . . . . . . . . . . . . . . .
400
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
725
SPECIALTY LAWN CARE
Statement of Owner’s Equity
Three Months Ended August 31, 2007
Oscar Wilson, Capital, June 1, 2007 . . . . .
Net Income for June-August . . . . . . . . . . . .
1,500
725
Oscar Wilson, Capital, August 31, 2007 . . .
2,225
32 䡲 Chapter 3
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SPECIALTY LAWN CARE
Balance Sheet
August 31, 2007
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . .
Equipment/Tool . . . . . . . . . . . . . . . . .
Truck . . . . . . . . . . . . . . . . . . . . . . . . .
250
575
500
900
Liabilities
Owner’s Equity
Oscar Wilson, Capital . . . . . . . . . . . . .
2,225
Total Assets . . . . . . . . . . . . . . . . . . . .
2,225
Total Liabilities and Owner’s Equity . . .
2,225
Oscar is better off than he would have been had he left his money in the savings account. He earned a profit
of $725 from his Specialty Lawn Care business, compared to approximately $22.50 in interest his money
would have earned over the three summer months (assuming a bank interest rate of 6%; $1,500 x 0.06 x
3/12).
Oscar needs to look beyond his current checking account balance of $250 and realize that this balance will
increase to $825 when he collects the $575 still owed to him. He also owns a truck and power mowers that
he could sell for additional cash.
Note to Instructor: This would be an ideal place to mention the concept of opportunity cost. If Oscar had not
started his lawn care business, he would have had time to work at another job, where he surely could have
earned more than $725 in three months.
Business Connections
Managerial Focus
1. Provide summaries of
(a) revenues and expenses,
(b) assets, liabilities, and owner’s equity.
2. Review of financial records containing cash available, amounts due and dates due.
3. Reduce expenses; increase sales volume or raise prices.
4. Net income (or net loss) for the period.
Ethical Dilemma
Do not open the account New Expenses without approval from the controller. You must identify what
expenses will be put into that account. Personal expense of the Accounts Payable clerk could be entered.
Streetwise
1. Responses will vary but should demonstrate an understanding that permanent accounts are found on
the balance sheet and statement of stockholders’ equity. Temporary accounts are found on the
statement of earnings.
2. Increase of the asset category Furniture, Fixtures, and Equipment by $25,000; increase of Accounts
Payable, $25,000.
Financial Statement Analysis
1. Financial data, operational information, plans for the future
2. $450.4 million
3. The creative professional line.
Analyze Online: Answers will vary depending on the current year.
Extending the Thought
Answers will vary. Students should recognize that all charts share a numbering system that groups assets,
liabilities, revenue, expenses, and owner’s equity accounts. Charts should contain both account titles and
numbers.
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Business Communication
Students’ answers will vary, but should include the fact that the trial balance can help the accountant reveal
a variety of errors that may have been made when transactions were recorded.
Team Work
All companies would have a cash account and accounts payable. A plumbing service would have accounts
receivable whereas a clothing store would have a credit card receivable. Both grocery store and clothing
store would have inventory. All would have wages expense except the real estate would have sales
commission. All would have office supplies expense. Depending on whether the company owned the
building most would have rent expense.
Internet Connection
Net Income will vary from year to year and company to company.
Practice Test Answer Key
Part A
1. T
2. F
3. T
4. T
5. T
6. F
7. F
8. F
9. F
10. F
11. T
12. T
13. T
14. T
15. T
True-False
Part B
1. f
2. b
3. d
4. i
5. h
6. c
7. e
8. g
9. a
Matching
Part C Completion
1. normal balance
2. trial balance
3. slide
4. transposition
5. footing
34 䡲 Chapter 3
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.