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Chapter 3: Question 1Q (page 78)

Give an example of a transaction that result in:

  1. A decrease in asset and a decrease in a liability.
  2. A decrease in one asset and an increase in another asset.
  3. A decrease in one liability and an increase in another liability.

Short Answer

Expert verified
  1. Payment to creditors.
  2. Goods purchased for cash.
  3. Issuance of bills payable to creditors.

Step by step solution

01

Meaning of transaction

A transaction can be understood as an activity between a buyer and a seller to interchange goods, services, or assets for money.

02

Explanation for statement ‘a’

An example of a decrease in asset and a liability is payment made by the company to its creditors using cash, in this case, the creditors or liability decreases, as well as a decrease in the cash account.

03

Explanation for statement ‘b’

An example of a decrease in one asset and an increase in the other is the acquisition of inventory for cash, here inventory will increase and cash will decrease.

04

Explanation for statement ‘c’

An example of a decrease in one liability and an increase in another liability is a partner’s loan converted into capital, there will be an increase in capital and decrease in loan.

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Most popular questions from this chapter

BE3-9 (L03) Prepare the following adjusting entries at August 31 for Walgreens. (a) Interest on notes payable of \(300 is accrued. (b) Services performed but unbilled total \)1,400. (c) Salaries and wages earned by employees of \(700 have not been recorded. (d) Bad debt expense for year is \)900. Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable, Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Listed below are the transactions of Yasunari Kawabata, D.D.S., for the month of September.

Sep. 1

Kawabata begins practice as a dentist and invests \(20,000 cash

2

Purchases dental equipment on account from Green Jacket Co. for \)17,280

4

Pays rent for office space, \(680 for the month.

4

Employs a receptionist, Michael Bradley

5

Purchases dental supplies for cash, \)942

8

Receives cash of \(1,690 from patients for services performed

10

Pays miscellaneous office expenses, \)430.

14

Bills patients \(5,820 for services performed.

18

Pays Green Jacket Co. on account, \)3,600.

19

Withdraws \(3,000 cash from the business for personal use.

20

Receives \)980 from patients on account

25

Bills patients \(2,110 for services performed

30

Pays the following expenses in cash: salaries and wages \)1,800; miscellaneous office expenses \(85.

30

Dental supplies used during September, \)330.

Instructions

  1. Enter the transactions shown above in appropriate general ledger accounts (use T-accounts). Use the following ledger accounts: Cash, Accounts Receivable, Supplies, Equipment, Accumulated Depreciation—Equipment, Accounts Payable, Owner’s Capital, Service Revenue, Rent Expense, Office Expense, Salaries and Wages Expense, Supplies Expense, Depreciation Expense, and Income Summary. Allow 10 lines for the Cash and Income Summary accounts, and 5 lines for each of the other accounts needed. Record depreciation using a 5-year life on the equipment, the straight-line method, and no salvage value. Do not use a drawing account.
  2. Prepare a trial balance
  3. Prepare an income statement, a statement of owner’s equity, and an unclassified balance sheet.
  4. Close the ledger
  5. Prepare a post-closing trial balance.

Is it necessary that a trial balance be taken periodically? What purpose does it serve?

Selected accounts of Urdu Company are shown below.

Supplies

Beg. Bal

800

10 ⁄ 31

470

Salaries and Wages Expense

10 ⁄ 15

800

10 ⁄ 31

600

Unearned Service Revenue

10 ⁄ 31

400

10 ⁄ 20

650

Service Revenue

10 ⁄ 17

2,400

10 ⁄ 31

1,650

10 ⁄ 31

400

Accounts Receivable

10 ⁄ 17

2,400

10 ⁄ 31

1,650

Salaries and Wages Payable

10 ⁄ 31

600

Supplies Expense

10 ⁄ 31

470

Instructions

From an analysis of the T-accounts, reconstruct

(a) the October transaction entries, and

(b) the adjusting journal entries that were made on October 31, 2017. Prepare explanations for each journal entry

Question: The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed below appeared in the December 31, 2017, trial balance.

Debit

Credit

Prepaid advertising

\(6,000

Equipment

192,000

Accumulated depreciation

\)60,000

Note payable

90,000

Unearned service revenue

17,500

Ticket revenue

360,000

Advertising expenses

18,680

Salaries and wages expenses

67,600

Interest expenses

1,400

Additional information is available as follows.

1. The equipment has an estimated useful life of 16 years and a salvage value of \(40,000 at the end of that time. Amato uses the straight-line method for depreciation.

2. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis.

3. Late in December 2017, the theater sold 350 coupon ticket books at \)50 each. Two hundred of these ticket books have been used by year-end. The cash received was recorded as Unearned Service Revenue.

4. Advertising paid in advance was \(6,000 and was debited to Prepaid Advertising. The company has used \)2,500 of the advertising as of December 31, 2017.

5. Salaries and wages accrued but unpaid at December 31, 2017, were $3,500.

Accounting

Prepare any adjusting journal entries necessary for the year ended December 31, 2017.

Analysis

Determine Amato’s income before and after recording the adjusting entries. Use your analysis to explain why Amato’s bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.

Principles

Although Amato’s bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent in preparing financial statements for shorter accounting time periods?
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