Chapter
Review
Exercise
1-3
McGraw-Hill/Irwin1
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Exercise 1: Business Entity (Chap 1)
Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.

Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen
nor Fitch

has personal responsibility for the debts of Financial Services.
Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally
liable for the debts of the business.

XLT Services does not have separate legal existence apart from the one person who
owns it.

BioProducts does not pay income taxes and has one owner.

Tampa Biz pays its own income taxes and has two owners.
McGraw-Hill/Irwin2
© The McGraw-Hill Companies, Inc., 2006
Exercise 1: Business Entity (Chap 1)
Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.
Characteristics Proprietorship Partnership Corporation
 Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.
Business
entity
yes a financial services
yes provider. Neither
yesChen
 Jo Chen and
Al Fitch own Financial Services,
nor Fitch
Financial Services. yes
Legal
entity has personal responsibility
no for the debts of no
 Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally
Limited
liability
no
no
yes
liable for the debts of the business.
Unlimited
life
yes
 XLT Services
does not have separateno
legal existence apart no
from the one person
who
owns it.
Business
taxed
no
no
yes
 BioProducts does not pay income taxes and has one owner.
One
owner
allowed
yes
 Tampa
Biz pays
its own income taxesyes
and has two owners. no
McGraw-Hill/Irwin3
© The McGraw-Hill Companies, Inc., 2006
Exercise 1: Business Entity (Chap 1)
Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock. (Corporation)

Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.
(Sole proprietorship )

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor
Fitch has personal responsibility for the debts of Financial Services. (Corporation, Limited
Liability)

Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable
for the debts of the business. (Partnership, Unlimited Liability)

XLT Services does not have separate legal existence apart from the one person who owns
it. (Sole proprietorship, not a legal entity )

BioProducts does not pay income taxes and has one owner. (Sole proprietorship, Income
not taxed )

Tampa Biz pays its own income taxes and has two owners.(Corporation,Income taxed)
McGraw-Hill/Irwin4
© The McGraw-Hill Companies, Inc., 2006
Exercise 2: Accounting Equation & F/S (Chap 2)
What is the number for ‘?’
December 31. 2004:
Assets
Liabilities
December 31 , 2005:
Assets
Liabilities
During year 2005:
Owner investments
Net income
Owner cash withdrawals
McGraw-Hill/Irwin5
A
$45,000
23,500
B
$35,000
22,500
C
$29,000
14,000
D
$80,000
38,000
E
$123,000
?
48,000
?
41,000
27,500
?
19,000
125,000
64,000
112,500
75,000
5,000
7,500
2,500
1,500
?
3,000
7,750
9,000
3,875
?
12,000
0
4,500
18,000
9,000
© The McGraw-Hill Companies, Inc., 2006
Exercise 2: Accounting Equation & F/S (Chap 2)
Assets
=
+
Liabilities
December 31. 2004:
Assets
Liabilities
Equity
A
$45,000
23,500
21,500
B
$35,000
22,500
12,500
C
$29,000
14,000
15,000
D
$80,000
38,000
42,000
E
$123,000
?
December 31 , 2005:
Assets
Liabilities
Equity
48,000
?
41,000
27,500
13,500
?
19,000
125,000
64,000
61,000
112,500
75,000
37,500
During year 2005:
Equity 12/31/2004
Owner investments
Net income
Owner cash withdrawals
Equity 12/31/2005
Equity
xxx Company
Statement of Ow ner's Equity
21,500
5,000
7,500
2,500
12,500
1,500
?
3,000
13,500
15,000
7,750
9,000
3,875
42,000
?
12,000
0
61,000
For Month Ended December 31, 2005
4,500
18,000
9,000
37,500
Equity, Dec. 31, 2004
$
Plus: Investment by ow ner
5,000
Net income
7,500
Less: Withdraw als
Equity, Dec. 31, 2005
McGraw-Hill/Irwin6
21,500
2,500
$
31,500
© The McGraw-Hill Companies, Inc., 2006
Exercise 2: Accounting Equation & F/S (Chap 2)
December 31. 2004:
Assets
Liabilities
Equity
A
$45,000
23,500
21,500
B
$35,000
22,500
12,500
C
$29,000
14,000
15,000
D
$80,000
38,000
42,000
E
$123,000
?
24,000
December 31 , 2005:
Assets
Liabilities
Equity
48,000
?
31,500
41,000
27,500
13,500
?
19,000
27,875
125,000
64,000
61,000
112,500
75,000
37,500
During year 2005:
Equity 12/31/2004
Owner investments
Net income
Owner cash withdrawals
Equity 12/31/2005
21,500
5,000
7,500
2,500
31,500
12,500
1,500
2,500
3000
13,500
15,000
7,750
9,000
3,875
27,875
42,000
7,000
12,000
0
61,000
24,000
4,500
18,000
9,000
37,500
McGraw-Hill/Irwin7
© The McGraw-Hill Companies, Inc., 2006
Exercise 2: Accounting Equation & F/S (Chap 2)
McGraw-Hill/Irwin8
December 31. 2004:
Assets
Liabilities
Equity
A
$45,000
23,500
21,500
B
$35,000
22,500
12,500
C
$29,000
14,000
15,000
D
$80,000
38,000
42,000
E
$123,000
99,000
24,000
December 31 , 2005:
Assets
Liabilities
Equity
48,000
16,500
31,500
41,000
27,500
13,500
46,875
19,000
27,875
125,000
64,000
61,000
112,500
75,000
37,500
During year 2005:
Equity 12/31/2004
Owner investments
Net income
Owner cash withdrawals
Equity 12/31/2005
21,500
5,000
7,500
2,500
31,500
12,500
1,500
2,500
3000
13,500
15,000
7,750
9,000
3,875
27,875
42,000
7,000
12,000
0
61,000
24,000
4,500
18,000
9,000
37,500
© The McGraw-Hill Companies, Inc., 2006
Exercise 3: Account Type (Chap 2)
(1) Type of account as an asset, liability, equity, revenue, or expense?
(2) debit (Dr.) or credit (Cr.) when account increase?
(3) Normal balance of the account?
Type
Account increase Normal balance
Unearned Revenue
Accounts Payable
Postage Expense
Prepaid Insurance
Wages Expense
Land
Owner Capital
Accounts Receivable
Owner Withdrawals
Cash
Equipment
Fees Earned
McGraw-Hill/Irwin9
© The McGraw-Hill Companies, Inc., 2006
Asset Accounts
Cash
Land
Buildings
Asset
Accounts
Accounts
Receivable
Notes
Receivabl
e
Prepaid
Accounts
Equipment
Supplies
McGraw-Hill/Irwin10
© The McGraw-Hill Companies, Inc., 2006
Asset account
 Cash: reflects a company’s cash balance.
 Account receivable: held by a seller and refer
to promises of payment from customers to
sellers. (credit sales or sales on account)
 Note receivable: a written promise of another
entity to pay a definite sum of money on a
specified future date to the holder of the note.
 Prepaid account: represent prepayments of
future expenses. (ex. prepaid insurance)
McGraw-Hill/Irwin11
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Asset account
 Supplies: belong to asset until they are used.
When they are used, their costs are
transferred from the asset accounts to
expense accounts.
 Equipment: When it is used and gets worn
down its cost is gradually reported as an
expense (called depreciation).
McGraw-Hill/Irwin12
© The McGraw-Hill Companies, Inc., 2006
Liability Accounts
Accounts
Payable
Notes
Payable
Liability
Accounts
Accrued
Liabilities
McGraw-Hill/Irwin13
Unearned
Revenues
© The McGraw-Hill Companies, Inc., 2006
Liability accounts
 Accounts payable: oral or implied promises to
pay later, commonly arise from purchases of
merchandise.
 Note payable: a formal promise, usually
denoted by the signing of a promissory note, to
pay a future amount.
 Accrued liabilities: They are amounts owed
that are not yet paid (ex. Wages payable,
taxes payable).
McGraw-Hill/Irwin14
© The McGraw-Hill Companies, Inc., 2006
Liability accounts
 Unearned revenue: a liability that is settled in
the future when a company delivers its
products or services. When customers pay in
advance for products or services (before
revenue is earned), the revenue recognition
principle requires that the seller consider this
payment as unearned revenue (ex. Unearned
ticket revenue).
McGraw-Hill/Irwin15
© The McGraw-Hill Companies, Inc., 2006
Equity Accounts
Owner’s
Capital
Owner’s
Withdrawals
Equity
Accounts
Revenues
McGraw-Hill/Irwin16
Expenses
© The McGraw-Hill Companies, Inc., 2006
Equity Accounts
Assets
+
Owner’s
Capital
McGraw-Hill/Irwin17
=
Liabilities
–
Owner’s
Withdrawals
+
Equity
–
+
Revenues
Expenses
© The McGraw-Hill Companies, Inc., 2006
Equity accounts
 Revenues: gross increase in equity from a
company’s earnings activities.
 Expenses: the cost of assets or services used
to earn revenue. Expenses decrease owner’s
equity.
 Owner investments: the amounts an owner
puts into the company.
 Owner withdrawals: the amounts take away
from the company for personal use.
McGraw-Hill/Irwin18
© The McGraw-Hill Companies, Inc., 2006
Exercise 3: Accounting Type (Chap 2)
(1) Type of account as an asset, liability, equity, revenue, or expense,
(2) debit (Dr.) or credit (Cr.) when account increase
(3) Normal balance of the account.
Type
McGraw-Hill/Irwin19
Account increase Normal balance
Unearned Revenue
Liability
Cr.
Cr.
Accounts Payable
Liability
Cr.
Cr.
Postage Expense
Expense
Dr.
Dr.
Prepaid Insurance
Asset
Dr.
Dr.
Wages Expense
Expense
Dr.
Dr.
Land
Asset
Dr.
Dr.
Owner Capital
Equity
Cr.
Cr.
Accounts Receivable
Asset
Dr.
Dr.
Owner Withdrawals
Equity
Dr.
Dr.
Cash
Asset
Dr.
Dr.
Equipment
Asset
Dr.
Dr.
Fees Earned
Revenue
Cr.
Cr.
© The McGraw-Hill Companies, Inc., 2006
Exercise 4: T-Account, Debit & Credit (Chap 2)
Use the information in each of the following separate cases to
calculate the unknown amount:
•
During October, Shandra Company had $97,500 of cash receipts and
$101,250 of cash disbursements. The October 31 Cash balance was
$16,800. What is the cash balance on September 30.
• On September 30, Li Ming Co. had a $97,500 balance in Accounts
Receivable. During October, the company collected $88,950 from its
credit customers. The October 31 balance in Accounts Receivable was
$100,500. Determine the amount of sales on account that occurred in
October.
• Nasser Co. had $147,000 of accounts payable on September 30 and
$136,500 on October 31. Total purchases on account during October were
$270,000. how much cash was paid on accounts payable during October.
McGraw-Hill/Irwin20
© The McGraw-Hill Companies, Inc., 2006
Exercise 4: T-Account, Debit & Credit (Chap 2)
1) During October, Shandra Company had $97,500 of cash receipts and $101,250 of cash
disbursements. The October 31 Cash balance was $16,800. What is the cash balance on
September 30.
Cash
Balance 9/30
Cash Receipt
Balance 10/31
20,550
97,500 Cash Disburment
16,800
101,250
2) On September 30, Li Ming Co. had a $97,500 balance in Accounts Receivable. During
October, the company collected $88,950 from its credit customers. The October 31
balance in Accounts Receivable was $100,500. Determine the amount of sales on
account that occurred in October.
Balance 9/30
Credit Sales
Balance 10/31
Account Receivable
97,500
91,950 Cash Collected
100,500
88,950
3) Nasser Co. had $147,000 of accounts payable on September 30 and $136,500 on
October 31. Total purchases on account during October were $270,000. how much cash
was paid on accounts payable during October.
Cash paid
McGraw-Hill/Irwin21
Account Payable
Balance 9/30
280,500 Purchase
Balance 10/31
147,000
270,000
136,500
© The McGraw-Hill Companies, Inc., 2006
Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)
Roberto Ricci opens a computer consulting business called Viva Consultants and completes
the following transactions in its first month of operations:
Apr. 1: Ricci invests $100,000 cash along with office equipment valued at $24,000 in the business.
Apr. 2: Prepaid $7,200 cash for twelve months' rent for office space.
Apr. 3: Made credit purchases for $12,000 in office equipment and $2,400 in office supplies. Payment is
due within 10 days.
Apr. 6: Completed services for a client and immediately received $2,000 cash.
Apr. 9: Completed an $8,000 project for a client, who must pay within 30 days.
Apr. 13: Paid $14,400 cash to settle the account payable created on April 3.
Apr. 19: Paid $6,000 cash for the premium on a 12-month insurance policy.
Apr. 22: Received $6,400 cash as partial payment for the work completed on April 9.
Apr. 25: Completed work for another client for $2,640 on credit.
Apr. 28: Ricci withdrew $6,200 cash for personal use.
Apr. 29: Purchased $800 of additional office supplies on credit.
Apr. 30: Paid $700 cash for this month's utility bill.
McGraw-Hill/Irwin22
© The McGraw-Hill Companies, Inc., 2006
Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)
Account Title
Apr. 1 Cash
Office Equipment
R. Ricci Capital
PR Debit Credit
101 100,000
163 24,000
301
124,000
Apr.
Apr.
Apr.
Apr. 2 Prepaid Rent
Cash
131
101
7,200
Bal.
Apr. 3 Office Equipment
Office Supplies
Account Payable
163
124
201
12,000
2,400
Apr. 6 Cash
2,000
Service Revenue
101
403
Apr. 9 Account Receivable
Service Revenue
106
403
8,000
Apr. 13 Account Payable
Cash
201
101
14,400
Apr. 19 Prepaid Insurance
Cash
128
101
6,000
101
Account Receivable 106
6,400
Cash
101
1 100,000 Apr. 2
7,200
6
2,000 Apr. 13 14,400
22
6,400 Apr. 19
6,000
Apr. 28
6,200
Apr. 30
700
73,900
Account Receivable
Apr. 9
8,000 Apr. 22
Apr. 25
2,640
Bal.
106
6,400
4,240
7,200
Office Supplies
Apr. 3
2,400
Apr. 29
800
124
Prepaid Rent
Apr. 2
7,200
131
14,400
Bal.
2,000
3,200
Bal.
Prepaid Insurance
Apr. 19
6,000
128
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Prepaid Insurance
Office Equipment
Accounts Payable
R. Ricci Capital
R. Ricci Withdrawal
Revenue
Expense
Dr.
73,900
4,240
3,200
7,200
6,000
36,000
Cr.
800
124,000
6,200
12,640
700
137,440 137,440
7,200
Office Equipment
Apr. 1
24,000
Apr. 3
12,000
163
8,000
Bal.
6,000
Bal.
36,000
14,400
Liability Accounts
Apr. 22 Cash
6,000
Accounts Payable
Apr. 13 14,400 Apr. 3
Apr. 29
6,400
Bal.
Apr. 25 Account Receivable
Service Revenue
106
403
2,640
Apr. 28 R.Ricci Withdraw
Cash
302
101
6,200
Apr. 29 Office Supplies
Account Payable
124
201
800
Apr. 30 Utility Expense
Cash
690
101
700
2,640
6,200
800
Equity Accounts
R. Ricci Capital
301
Apr. 1 124,000
Bal.
124,000
R. Ricci Withdrawal
Apr. 28
6,200
Bal.
302
6,200
800
700
Service Revenue
403
Apr. 6
2,000
Apr. 9
8,000
Apr. 25
2,640
Bal.
McGraw-Hill/Irwin23
201
14,400
800
12,640
Utility Expense
Apr. 30
700
Bal.
690
700
© The McGraw-Hill Companies, Inc., 2006
Exercise 6: Adjusting Journal Entry (Chap 3)
Prepare Adjusting Journal Entry for year ended at 12/31/2005
1) Depreciation on equipment for 2005 is $16,000
2) Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only $1,040
unexpired
3) Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was purchased.
On 12/31/2005, physical count show $345 supplies remain.
4) Half of work related to$10,000 cash received in advance was performed in 2005.
5) Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that $4,600
coverage had expired.
6) Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005
McGraw-Hill/Irwin24
© The McGraw-Hill Companies, Inc., 2006
Exercise 6: Adjusting Journal Entry (Chap 3)
Prepare Adjusting Journal Entry for year ended at 12/31/2005
1) Depreciation on equipment for 2005 is $16,000
12/31/2005
Dr. Depreciation Expense
$16,000
Cr. Accumulated Depreciation – Equipment
$16,000
To record depreciation expense for the year.
2) Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only $1,040
unexpired
12/31/2005
Dr. Insurance Expense
$5,960
Cr. Prepaid Insurance
$5,960
To record insurance coverage that expired ($7,000 - $1,040).
3) Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was purchased.
On 12/31/2005, physical count show $354 supplies remain.
12/31/2005
Dr. Supplies Expense
Cr. Supplies
$2,626
$2,626
Office Supplies
Bal. 12/31/2004
300
Purchase
2,680 Usage
Bal.
2,626
354
To record office supplies used ($300 + $2,680 - $354).
McGraw-Hill/Irwin25
© The McGraw-Hill Companies, Inc., 2006
Exercise 6: Adjusting Journal Entry (Chap 3)
Prepare Adjusting Journal Entry for year ended at 12/31/2005
4) Half of work related to$10,000 cash received in advance was performed in 2005.
12/31/2005
Dr. Unearned Fee Revenue
$5,000
Cr. Fee Revenue
$5,000
To record earned portion of fee received in advance ($10,000 x 1/2).
5) Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that $4,600
coverage had expired.
12/31/2005
Dr. Insurance Expense
$4,600
Cr. Prepaid Insurance
$4,600
To record insurance coverage that expired.
6) Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005
12/31/2005
Dr. Wage Expense
Cr. Wage Payable
$4,000
$4,000
To record wages accrued but not yet paid.
McGraw-Hill/Irwin26
© The McGraw-Hill Companies, Inc., 2006