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Accounting chapter two – summary and questions

Discussion Questions

  1. Why is the use of a transactions worksheet impractical in actual practice?
  2. . What is an ‘account’? How are debits and credits used to record transactions?

  1. Some tend to associate “good” and “bad” or “increase” and “decrease” with credits and debits. Is this a valid association? Explain.

  1. The pattern of recording increases as debits and decreases as credits is common to asset and expense accounts. Provide an example.
  2. The pattern of recording increases and credits and decreases as debits is common to liabilities, equity, and revenue accounts. Provide an example.

  1. Summarise the rules for using debits and credits to record assets, expenses, liabilities, equity, and revenues.
  2. What is a Trial Balance? Why is it prepared?
  3. How is a Trial Balance used to prepare financial statements?
  4. A General Journal is often called a book of original entry. Why?
  5. The positioning of a debit-credit entry in the General Journal is similar in some respects to instructions written in a computer program. Explain, using an example.
  6. What is a General Ledger? Why is it prepared?
  7. What is a Chart of Accounts? How are the accounts generally arranged and why?
  8. List the steps in the accounting cycle.

Exercises

EXERCISE 2–1 (LO1) Accounts
Below is a list of various accounts:

EXERCISE 2–2 (LO1) Accounts
Required: Using the list from EXERCISE 2–1, identify if a debit or credit is needed to decrease the normal balance of each account.

EXERCISE 2–3 (LO2)
Required: Record the debit and credit for each of the following transactions (transaction 1 is done for you):

EXERCISE 2–5 (LO2) Using T-accounts

Below are various transactions for the month of August, 2016, for BOLA Co. This is their first month of operations.

  1. Issued share capital in exchange for $3,000 cash.
  2. Received an invoice from the utilities company for electricity in the amount of $200.
  3. Bank approved a loan and deposited $10,000 into the company’s bank account.
  4. Paid employee salaries in the amount of $2,000.
  5. Received repair services worth $5,000 from a supplier in exchange for a note due in thirty days.
  6. Completed service work for a European customer. Invoiced $8,000 EURO (European funds). The Canadian currency equivalent is $12,000 CAD. (hint: Recall the monetary unit principle.)
  7. Completed $7,000 of service work for a customer on account.
  8. Purchased $1,000 of equipment, paying cash.
  9. Received $8,000 EURO ($12,000 CAD) cash for service work done regarding item (6).
  10. Rent of $5,000 cash was paid for the current month’s rent.
  11. Made a payment of $1,500 cash as a loan payment regarding item (3). The payment covered $150 for interest expense and the balance of the cash payment was to reduce the loan balance owing.
  12. Reimbursed $25 in cash to an employee for use of his personal vehicle for company business for a business trip earlier that day.
  13. Received a cash of $5,000 regarding the service work for item (7).
  14. Vehicle worth $30,000 purchased in exchange for $10,000 cash and $20,000 note due in six
    months.
  15. Paid the full amount of the utilities invoice regarding item (2).
  16. Purchased $3,000 of furniture on account.
  17. Completed $2,000 of service work for a customer and collected cash.
  18. Received a cheque in the amount of $2,000 from a customer for service work to be done in two months.
  19. Purchased office supplies for $3,000 on account.
  20. Completed a project for a customer and billed them $8,000 for the service work.
  21. Purchased a laptop computer for $2,500 in exchange for a note payable.
  22. September rent of $5,000 was paid two weeks in advance, on August 15.

Required: Create a separate T-account for each asset, liability, equity, revenue and expense account affected by the transactions above. Record the various transactions debits and credits into the applicable T-account (similar to the two T-accounts shown in Section 2.1, under the heading T-accounts, for Cash and Accounts payable). Calculate and record the ending balance for each T-account. (Hint: Include the reference to the transaction number for each item in the T-accounts, to make it easier to review later, if the accounts contain any errors.)

EXERCISE 2–6 (LO3) Preparing a Trial Balance

Required: Using the T-accounts prepared in EXERCISE 2–5, prepare an August 31, 2016, trial balance for the company based on the balances in the T-accounts.

EXERCISE 2–7 (LO3) Preparing Financial Statements

Required: Using the trial balance in EXERCISE 2–6, prepare the August 31, 2016, income statement, statement of changes in equity and the balance sheet for the company based on the balances in the T-accounts.

EXERCISE 2–8 (LO2)

Required: Post the following transactions to the appropriate accounts:

(1) Issued share capital for $5,000 cash (posted as an example).
(2) Paid $900 in advance for three months’ rent, $300 for each month.
(3) Billed $1,500 to customers for repairs completed today.
(4) Purchased on credit $2,000 of supplies to be used next month.
(5) Borrowed $7,500 from the bank.
(6) Collected $500 for the amount billed in transaction (3).
(7) Received a $200 bill for electricity used to date (the bill will be paid next month).
(8) Repaid $2,500 of the bank loan.
(9) Used $800 of the supplies purchased in transaction (4).
(10) Paid $2,000 for the supplies purchased in transaction (4).
(11) Recorded the use of one month of the rent paid for in transaction (2).

EXERCISE 2–9 (LO3)

The following Trial Balance was prepared from the books of Cross Corporation at its year-end, December 31, 2015. After the company’s bookkeeper left, the office staff was unable to balance the accounts or place them in their proper order. Individual account balances are correct, but debits may be incorrectly recorded as credits and vice-versa.

EXERCISE 2–10 (LO4)

Required: Prepare journal entries for each of the following transactions:

(a) Issued share capital for $3,000 cash.
(b) Purchased $2,000 of equipment on credit.
(c) Paid $400 cash for this month’s rent.
(d) Purchased on credit $4,000 of supplies to be used next month.
(e) Billed $2,500 to customers for repairs made to date.
(f) Paid cash for one-half of the amount owing in transaction (d).
(g) Collected $500 of the amount billed in transaction (e).
(h) Sold one-half of the equipment purchased in transaction 2 above for $1,000 in cash.

EXERCISE 2–12 (LO2,3,4)

The following journal entries were prepared for Elgert Corporation for its first month of operation, January 2015.

Required:

a. Prepare necessary General Ledger T-accounts and post the transactions.
b. Prepare a Trial Balance at January 31, 2015.
c. Prepare an Income Statement and Statement of Changes in Equity for the month ended January 31, 2015 and a Balance Sheet at January 31, 2015.

EXERCISE 2–13 (LO4) Correcting Errors in Journal Entries

Below are transactions that contain errors in the journal entry.

  1. Received an invoice from a supplier for advertising in the amount of $150.

PROBLEM 2–2 (LO1,2,3,4)

The following ledger accounts were prepared for Davidson Tool Rentals Corporation during the first month of operation ending May 31, 2015. No journal entries were prepared in support of the amounts recorded in the ledger accounts.

  1. Total the transactions in each T-account above. Prepare a Trial Balance in proper order (list assets, liabilities, equity, revenue, then expenses) at May 31, 2015.

Required: Prepare journal entries to record the April transactions.

PROBLEM 2–4 (LO1,2,4)
The following transactions occurred in Thorn Accounting Services Inc. during August 2015, its first month of operation.

PROBLEM 2–5 (LO4) Challenge Question – Errors in the Trial Balance
Below is the trial balance for Cushio Corp. which contains a number of errors:

The following errors were discovered:

  1. Cushio collected $5,000 from a customer and posted a debit to Cash but did not post a credit entry to accounts receivable.
  2. Cushio completed service work for a customer for $5,000 and debited accounts receivable but credited unearned revenue.
  3. Cushio received cash of $583 from a customer as payment on account and debited cash for $583, but incorrectly credited accounts receivable for $853.
  4. Cushio did not post an invoice of $500 received for repairs.
  5. Cushio purchased equipment for $5,000 on account and posted the transacƟon as a debit to accounts payable and a credit to equipment.
  6. Cushio purchased advertising services for cash of $6,000 that will be published in the newspapers over the next six months. This transaction was posted as a debit to advertising expense and a credit to cash for $6,000.

Required: Prepare a corrected trial balance.

Listed below are activities for Stellar Services Ltd. for the month of January, 2016:

a. Stellar ordered $3,500 in new software from a software supplier. It will be paid when it is ready to install in three weeks.
b. Paid $12,000 for a two-year insurance policy to begin February 1, 2016.
c. Paid one half of the outstanding accounts payable.
d. Hired a new employee who will start up February 1, 2016. His salary will be $2,500 every two weeks.
e. Received cash of $200,000 from a client for a $1,000,000 consulting contract. Work will commence in April.
f. Booked a conference room at a hotel for a presentation to potential customers scheduled for February 15. The $600 rental fee will be paid February 1.
g. Met with a client’s lawyer about a fire that destroyed a portion of the client’s building. The client is planning to sue Stellar for $300,000 based on some previous consulting services Stellar provided to the client.
h. Completed four electrical inspections today on credit for $3,000 each.
i. Collected from two of the credit customers from item 8.
j. Received $20,000 from a client in partial payment for services to be provided next year.
k. Borrowed $150,000 from their bank by signing a note payable due on August 31, 2017.
l. John Stellar invested $30,000 cash and engineering equipment with a fair value of $10,000 in exchange for capital shares.
m. Stellar rented some additional office space and paid $18,000 for the next six month’s rent.
n. Purchased land and a small warehouse for $50,000 cash and a long-term note payable for the balance. The land was valued at $250,000 and the warehouse at $60,000.
o. Signed an agreement with a supplier for equipment rental for a special project to begin on February 23, 2016. A deposit for $300 is to be paid on February 1.
p. Completed $30,000 of services for a client which is payable in 30 days.
q. Purchased $8,000 of equipment for $5,000 cash and a trade-in of some old equipment that originally was recorded at $3,000.
r. Paid $1,000 in cash dividends.
s. Refunded the client $2,000 due to a complaint about the consulting services provided in item 16.
t. Paid salaries of $35,000.
u. Received a bill for water and electricity in the amount of $1,800 for January, which will be paid on February 15.
v. Purchased some office equipment for $5,000 and office supplies for $2,000 on account.
w. Placed an order with a supplier for $10,000 of drafting supplies to be delivered February 10. This must be paid by February 25.

Required:

  1. Prepare all required journal entries for January.
  2. Prepare the income statement, the statement of changes in equity and the balance sheet as at January 31, 2016.

PROBLEM 2–7 (LO4) Special Journals and Subledgers

PROBLEM 2–8 (LO4) Special Journals and Subledgers

  1. Prepare a trial balance from the general ledger accounts. Use the format shown in Section 2.3 of this chapter. Ensure that the trial balance debits equal the credits and that the subledgers balance to their respective accounts receivable and accounts payable control accounts.
  2. Prepare an income statement, statement of changes in equity and a balance sheet as at June 30, 20XX. Use the format shown in Section 2.3 of this chapter.

chapter two solutions

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