Chapter 2
Analyzing Transactions
Study Guide
Do You Know…?
Learning Objective 1: Describe the characteristics of an account and a chart of
accounts.
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□
The various types of accounts? (See exercises 1-3)
Which accounts financial statements will include? (See exercises 4-6)
Learning Objective 2: Describe and illustrate journalizing transactions using the
double-entry accounting system.
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The debit and credit rules for the various accounts? (See exercises 7-9)
The normal balance of the various accounts? (See exercises 10-12)
How to journalize various entries? (See exercises 13-15)
Learning Objective 3: Describe and illustrate the journalizing and posting of
transactions to accounts.
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How to post various journal entries into the related accounts? (See exercises 16-18)
How to calculate the missing amount from a T account? (See exercises 19-21)
Learning Objective 4: Prepare an unadjusted trial balance and explain how it can be
used to discover errors.
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How to prepare an unadjusted trial balance? (See exercises 22-24)
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How to journalize entries to correct errors? (See exercises 28-30)
The various methods used to discover errors in the unadjusted trial balance? (See
exercises 25-27)
Learning Objective 5: Describe and illustrate the use of horizontal analysis in
evaluating a company’s performance and financial condition.
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The steps in performing a horizontal analysis and if a change is favorable or
unfavorable? (See exercises 31-33)
1
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2
Chapter 2
Fill-in-the-Blank Equations
1. Balance of account = Debits – __________
2. Asset accounts have a ______ normal balance.
3. The owner’s drawing account has a __________ normal balance.
4. Revenue accounts have a ___________ normal balance.
5. Expense accounts have a _________ normal balance.
6. Liabilities and owner’s equity accounts normally have a ___________ balance.
7. Owner’s equity = Income statement accounts – __________________
Exercises
1. Determine which type of account is being described in each of the following definitions.
a. Resources of the company
b. Owner’s residual rights to assets after creditors
c. Sales of services or products
d. Amounts owed by the company
e. Consuming assets or services in order to produce revenue
2. Determine whether each of the following accounts is an asset, liability, revenue,
expense, or owner’s equity account.
a. Equipment
b. Utilities incurred & paid
c. Unearned Revenue
d. Sales
e. Peter Rice, Capital
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Analyzing Transactions
3
3. Would each of the following accounts be an example of an asset, liability, revenue,
expense, or owner’s equity account?
a. Salaries Payable
b. Cost of Sales
c. Common Stock
d. Investment in Securities
e. Fees Earned
4. Would the following accounts be found in a balance sheet or income statement?
a. Cash
b. Interest Revenue
c. Long-Term Debt
5. Which financial statements would include the following accounts?
a. Unearned Revenue
b. Gain on Sale of Investment
c. Rent Expense
6. Which financial statements would include the following accounts?
a. Machinery
b. Common Stock
c. Legal Expense
7. What is the effect of a debit and credit (increase and decrease) on the following account
balances?
a. Owner Withdrawals
b. Accounts Payable
c. Equipment
8. Would a debit or credit increase the following account balances?
a. Rachael Hay, Capital
b. Salaries Expense
c. Sales
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4
Chapter 2
9. Would a debit and credit increase or decrease the following account balances?
a. Prepaid Insurance
b. Interest Revenue
c. Long-Term Debt
10. Is the normal balance a debit or credit for the following accounts?
a. Property, Plant, and Equipment
b. Accounts Payable
c. Sales
11. Do the following accounts have a normal debit or credit balance?
a. Unearned Revenue
b. Salaries Expense
c. Interest Revenue
12. Would the following accounts have a normal debit or credit balance?
a. Owner’s Drawing Account
b. Fees Earned
c. Rent Expense
13. Prepare the journal entry to record payment of salaries for $750, rent for $675, utilities
for $250 and legal expenses for $130 on January 15, 2015.
14. Record the journal entry to record the purchase of inventory on account for $1,200 on
September 22, 2015.
15. What would the journal entry look like for rental revenue earned on August 9, 2015 for
$890 that the customers paid for on account?
16. Post the journal entry from exercise 13 to the related accounts.
17. Show how the journal entry from exercise 14 would be posted to the related accounts.
18. Post the journal entry from exercise 15 to the related accounts.
19. At the beginning of the year, Duck Co.’s Accounts Payable had a credit balance of
$1,300. The company made purchases of $1,700 on account. If the ending balance was a
credit of $600, what were the cash payments to suppliers?
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Analyzing Transactions
5
20. During the year, Keowee Corp. sold $1,550 of inventory. The company’s beginning
inventory was $1,200 and the ending inventory was $740. How much inventory did the
company purchase during the year?
21. Pepin Co. had an ending balance of $1,900 for Equipment. The company purchased
$2,300 of equipment and retired $750 of equipment during the year. What was the
beginning balance of the account?
22. Given the following account balances, prepare an unadjusted trial balance for Bakeshop
Corp. as of December 31, 2015.
•
Income Taxes Payable, credit balance $1,200
•
Sales Revenue, credit balance $8,750
•
PP&E, debit balance $7,500
•
Cost of Sales, debit balance $5,500
•
Accounts Payable, credit balance $1,240
•
Interest Revenue, credit balance $1,500
•
Cash, debit balance $2,000
•
Rental Expense, debit balance $3,550
•
Kim Akinson, Capital, credit balance $2,460
•
Long-Term Debt, credit balance $7,400
•
Accounts Receivable, debit balance $1,500
•
Salaries Expense, debit balance $1,200
•
Inventory, debit balance $1,300
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6
Chapter 2
23. Fill in the missing items for the following unadjusted trial balance for Ferris Co. as of
September 30, 2015.
Cash
Accounts
Receivable
Inventory
PP&E
Accounts Payable
Short-term Loans
Notes Payable
Allie Cobb, capital
Sales
Rental Revenue
Cost of Sales
Rental Expense
Wages Expense
Utilities Expense
??
??
??
Debits
1,600
Credits
1,300
??
8,750
5,050
2,300
1,700
5,000
10,000
6,800
8,000
4,500
2,300
2,000
??
??
24. Create Red Road Co.’s unadjusted trial balance for March 31, 2015 given the following
balances (assume all accounts have a normal balance):
• Property, Plant, and equipment, $15,500
• Wages Expense, $8,750
• Rental Revenue, $3,500
• Unearned Revenue, $4,270
• Noah Gosling, Capital, $6,500
• Accounts Payable, $3,280
• Prepaid Expenses, $1,200
• Notes Payable, $,3,950
• Fees Earned, $12,500
• Cash, $2,250
• Wages Payable, $4,150
• Rental Expense, $7,250
• Accounts Receivable $3,200
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Analyzing Transactions
7
25. Determine the effect, if any, of the following errors on the unadjusted trial balance.
a. The accountant records a payment of $1,600 for prepaid expenses as a debit to
Prepaid Expenses for $16,000 and a credit to Cash for $16,000. The correct
amount is $1,600.
b. To record the expense for wages, the company’s books show a debit to Wages
Expense for $3,200 and a credit to Cash for $2,300.
c. When preparing the purchase of inventory, the accountant debited Inventory for
$205 and credited Accounts Payable for $2,050.
26. Will the following errors cause debits or credits to be higher? If so, by how much?
a. When preparing the journal entry to record the purchase of land and a building,
the accountant debited Land for $12,000, Cash for $25,000, and credited
Building for $13,000.
b. The accountant accidentally credited Rental Revenue for $1,300 rather than
Interest Revenue when showing the cash received for interest on securities.
c. The company’s books show a debit of $4,500 to Accounts Receivable and a credit
to Sales for $450.
27. What is the dollar effect on the company’s unadjusted trial balance from the following
errors?
a. A debit to Equipment for $4,000 and a credit to Notes Payable for $400.
b. A debit to Wages Expense for $450, Supplies Expense for $220, Utilities Expense
for $550, and a credit to Cash for $1,270.
c. A debit to Cash for $525 and a credit to Sales for $255.
28. Prepare the journal entry to correct an error for a journal entry showing a debit to
Inventory and credit to Accounts Payable for $1,400. The company actually paid for the
purchase with cash.
29. When recording the journal entry for the purchase of new equipment for $5,500, the
accountant made a debit to Land for $5,500.
30. To record new long-term debt for $2,750, the company’s accountant credited Accounts
Payable instead.
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8
Chapter 2
31. Perform a horizontal analysis of the income statement below, showing changes in
dollars and percentages (rounded to the nearest whole percentage). Determine if
changes are favorable or unfavorable.
Jeffy's Bike Store
Income Statements
For the Years Ended September 30
Year 2
Rental revenue
$100,000
Operating expenses:
Rent expense
$ 12,000
Interest expense
1,500
Utilities expense
3,200
Wages expense
5,500
Total operating expenses
$ 22,200
Net income
$ 77,800
Year 1
$92,000
$11,500
1,600
2,660
5,000
$20,760
$71,240
32. Identify favorable and unfavorable trends from the income statements below by
performing a horizontal analysis. Show changes in amounts and percentages (rounded
to the nearest whole percentage).
Wheeler & Fetch, CPA
Income Statements
For the Years Ended June 30
Year 2
Fees earned
$185,000
Operating expenses:
Rent expense
$ 15,000
Salaries expense
25,000
Utilities expense
6,700
Supplies expense
9,000
Total operating expenses
$ 55,700
Net income
$129,300
Year 1
$179,500
$ 13,400
19,500
6,500
9,700
$ 49,100
$130,400
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Analyzing Transactions
9
33. By performing a horizontal analysis on the following income statements, identify
favorable and unfavorable trends. Show changes in amounts and percentages (rounded
to the nearest whole percentage).
Mig’s Market
Income Statements
For the Years Ended October 31
Year 2
Sales
$79,000
Cost of sales
$17,550
Operating expenses:
Rent expense
$13,200
Salaries expense
11,500
Utilities expense
4,200
Legal expense
10,000
Total operating expenses
$38,900
Net income
$22,550
Year 1
$68,500
$15,750
$12,000
13,000
3,600
13,200
$41,800
$10,950
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