financial accounting tools for business decision making 6e solution manual chapter 3

b Equation Analysis Equity Supplies Accounts Payable c Debit−Credit Analysis Debits increase assets: debit Supplies $250.. b Equation Analysis Equity Accounts Receivable Service Revenu

CHAPTER 3

The Accounting Information System

ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises Exercises

A Problems

2 Define debits and credits

and explain how they are

7B, 8B, 9B, 10B, 11B

4, 5, 7

ASSIGNMENT CHARACTERISTICS TABLE

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

ANSWERS TO QUESTIONS

1 An accounting information system is a system of collecting and processing transaction data and communicating financial information to decision-makers Some factors that shape these systems are the type of business and its transactions, the size of the company, the amount of data, and the information that management and other users need

2 Only events that cause a change in an asset, liability, or shareholders’ equity account are recorded as accounting transactions Other events, such as the agreement to provide a service, do not immediately impact an asset, liability, or shareholder’s equity account and, therefore, are not considered an accounting transaction

3 Accounting transactions are the economic events of the company recorded by accountants because they affect the accounting equation assets = liabilities + shareholders’ equity (a) Winning an award is not an accounting transaction, as it does not affect the accounting equation The award did not involve the receipt of an asset, such as cash (b) Supplies purchased on account is an accounting transaction because it affects the accounting equation (assets are increased because supplies were received and liabilities are increased because accounts payable were incurred)

(c) A shareholder dying is not an accounting transaction, as it does not affect the accounting equation

the accounting equation (shareholders’ equity is decreased and assets (cash) are decreased)

(e) The agreement to provide legal services to the company is not an accounting transaction as it does not affect the accounting equation No expense has been incurred yet and no liabilities like accounts payable have been affected

4 Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected An example would be a transaction where an increase in one asset is offset by a decrease in another asset A decrease in the Accounts Receivable account which is offset by an increase in the Cash account is a specific example (that is, a customer paying for goods previously purchased on account)

increased)

(b) Increase assets and increase liabilities

assets

Answers to Questions (Continued)

6 Natalie is incorrect A debit balance only means that debit amounts or transactions affecting an account exceed the credit amounts or transactions in an account Conversely,

a credit balance only means that credit amounts are greater than debit amounts in an account Thus, a debit or credit balance is neither favourable nor unfavourable

7 Shareholders' equity consists of different components, and they do not all move in the same direction Shareholders’ equity is usually comprised of share capital (which is increased by credits) and retained earnings Retained earnings can be further subdivided into revenues and expenses and dividends which are then added to opening retained earnings Revenues are increased by credits while expenses and dividends are increased

by debits

Answers to Questions (Continued)

11 (a) A general journal is a book of original entry, in which transactions are recorded in

12 (a) Including a date in a journal entry is important because it is necessary to identify

which accounting period is affected by a transaction Other transactions may follow which are based on the date of the journal entry For example, the date a sales invoice is recorded may determine when the date of payment for the invoice is due (b) Recording debit entries first is important because it visually separates the accounts involved in the left side of the transaction

(c) Indenting credit entries is important because the indentation differentiates debits from credits and decreases the chance of switching the debit and credit amounts by mistake

(d) Including a brief explanation to the journal entry is important because it provides the background information that might be necessary to interpret the transaction recorded

13 While the account title choices suggested by Meghan provide details of the type of truck the company purchased, the title of the account used to record the purchase should be more generic to include all types of trucks that can be owned and used by the business Ambiguous or multiple account titles with similar names can lead to incorrect financial reporting Unless the business is intending on purchasing more than one type of truck the name of the account that should be used is Trucks or Vehicles

14 This would not be efficient because the journal provides a record that shows both “sides” of the transaction along with a description of the transaction This information is vital to the understanding of the event Furthermore, if there is a large volume of transactions, a company will not post individual transactions to the general ledger; instead totals of transactions are posted For example, if 1,000 sales transactions occurred in a month, only one amount (the total of sales for the month) would be posted to the sales account in the general ledger (there would still be 1,000 journal entries in the general journal, however)

15 Posting should be done on a timely basis, at least monthly, so that account balances can

be monitored and reconciled

Answers to Questions (Continued)

16 (a) The general ledger is the entire group of accounts maintained by a company,

including all the asset, liability, and shareholders' equity accounts, including share capital, retained earnings, dividend, revenue, and expense accounts

the financial statements, beginning with the statement of financial position accounts The asset accounts come first, followed by liability accounts, and then shareholders’ equity accounts, including the share capital, retained earnings, dividend, revenue, and expense accounts

17 (a) The chart of accounts is a list of a company’s accounts The chart of accounts is

important, particularly for a company that has a large number of accounts because it helps organize the accounts and identify their location in the ledger

18 Cash, supplies, prepaid insurance, unearned revenue, common shares, dividends, service revenue, and income tax expense

19 (a) A trial balance is a list of accounts and their balances at a point in time The primary

purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted A trial balance also facilitates the discovery of errors in journalizing and posting In addition, it is useful in preparing financial statements

20 While it does not matter in what order the accounts are listed in the trial balance, it is usual for the accounts in the trial balance to be listed in the same order as they are listed in the general ledger (asset accounts, liability accounts, and shareholders’ equity accounts, including share capital, retained earnings, dividend, revenue, and expense accounts) This makes it easier to compare the trial balance accounts to the general ledger accounts, as well as later to prepare the financial statements from the trial balance

21 The retained earnings account in the trial balance shows the beginning balance of the period as it has not yet been updated for the effect that the revenues, expenses, and

dividends have on retained earnings for the current accounting period (Note to instructors:

This chapter only includes references to a pre-closing trial balance; the post-closing trial balance is not introduced until Chapter 4.)

Answers to Questions (Continued)

to Supplies and a credit to Accounts Payable Total debits will exceed total credits by

an amount that is equal to twice the value of the entry that was not posted correctly (b) The trial balance will still balance as a debit and a credit have been recorded for the

same amount Total debits will equal total credits

the amount posted as a credit The total debits will be higher by the difference in the two amounts posted

23 The first four steps in the accounting cycle are:

(1) Analyze the business transactions and determine their effects on the accounting equation and also determine when and how to record the transactions

(2) Journalize the transactions in the general journal to record the effects of the transactions on the accounts involved in the transactions

(3) Post to the general ledger accounts to provide an accumulation of the effect of several journalized transactions in the individual accounts

(4) Prepare a trial balance to prove that the sum of the debit account balances equals the sum of the credit account balances after posting

SOLUTIONS TO BRIEF EXERCISES

Prepaid Insurance

= Accounts Payable

Unearned Revenue +

Common Shares

Retained Earnings +

Revenues

– Expenses

– Dividends

BRIEF EXERCISE 3-2

Debit Effect

Credit Effect

Normal Balance

Statement Classification

position

BRIEF EXERCISE 3-3

for $2,500 cash

(a) Basic

Analysis

Debits increase assets: debit Cash $2,500

Credits increase share capital (shareholders’ equity): credit Common Shares $2,500

(a) Basic

Analysis

The asset account Supplies is increased by $250; the liability account Accounts Payable is increased by $250

(b) Equation

Analysis

Equity Supplies

Accounts Payable

(c) Debit−Credit

Analysis

Debits increase assets: debit Supplies $250

Credits increase liabilities: credit Accounts Payable $250

BRIEF EXERCISE 3-3 (Continued)

(a) Basic

Analysis

The asset account Accounts Receivable is increased by $300;

the revenue account Service Revenue is increased by $300

(b) Equation

Analysis

Equity Accounts

Receivable

Service Revenue

(c) Debit−Credit

Analysis

Debits increase assets; debit Accounts Receivable $300

Credits increase revenues; credit Service Revenue $300

June 12

(a) Basic

Analysis

The asset account Cash is increased by $300; the Asset account Accounts Receivable is decreased by $300

(b) Equation

Analysis

Assets = Liabilities + Shareholders’

Equity Cash

+$300

Accounts Receivable -$300

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $300

Credits decrease assets: credit Accounts Receivable $300

BRIEF EXERCISE 3-3 (Continued)

(a) Basic

Analysis

An accounting transaction has not occurred There is only an agreement of employment to start on July 2

welding work to be done in July

(a) Basic

Analysis

The asset account Cash is increased by $200; the liability account Unearned Revenue is increased by $200

(b) Equation

Analysis

Equity Cash

Unearned Revenue

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $200

Credits increase liabilities: credit Unearned Revenue $200

(a) Basic

Analysis

The asset account Cash is decreased by $250; the liability account Accounts Payable is decreased by $250

(b) Equation

Analysis

Equity Cash

Accounts Payable

(c) Debit−Credit

Analysis

Debits decrease liabilities: debit Accounts Payable $250

Credits decrease assets: credit Cash $250

BRIEF EXERCISE 3-3 (Continued)

(a) Basic

Analysis

The expense account Income Tax Expense is increased by

$100; the asset account Cash is decreased by $100

(b) Equation

Analysis

Equity Cash

Income Tax Expense

(c) Debit−Credit

Analysis

Debits increase expenses: debit Income Tax Expense $100

Credits decrease assets: credit Cash $100

Payable

Increase

BRIEF EXERCISE 3-5

1 Supplies 250

Accounts Payable 250

2 Accounts Receivable 500

Service Revenue 500

3 Salaries Expense 300

Cash 300

4 Cash 5,000 Common Shares 5,000 5 Dividends 400

Cash 400

6 Cash 500

Accounts Receivable 500

7 Accounts Payable 250

Cash 250

8 Prepaid Insurance 100

Cash 100

9 Cash 300

Unearned Revenue 300

10 Unearned Revenue 300

Service Revenue 300

BRIEF EXERCISE 3-6

June 1 Cash 2,500

2 Supplies 250

Accounts Payable 250

12 Accounts Receivable 300

Service Revenue 300

22 Cash 300

Accounts Receivable 300

25 No transaction – no asset, liability or equity account affected 28 Cash 200

Unearned Revenue 200

29 Accounts Payable 250

Cash 250

30 Income Tax Expense 100

Cash 100

BRIEF EXERCISE 3-7

1 Cash 5,000

2 Prepaid Rent 2,100

3 Salaries Expense 500

Cash 500

4 Accounts Receivable 1,200 Service Revenue 1,200 5 Cash 900

Accounts Receivable 900

6 Supplies 500

Accounts Payable 500

7 Accounts Payable 500

Cash 500

8 Cash 1,000

BRIEF EXERCISE 3-8

Aug 23 (a) 15,000 Aug 29 5,800 15 45,000 Bal 9,000

Bal 3,600 Bal (e) 94,500

Sept 15 8,000 Sept 23 5,900 Sept 25 450 Bal 5,000

BRIEF EXERCISE 3-10

(a)

BRIEF EXERCISE 3-11

CARLAND INC

Trial Balance June 30, 2015

200

4,000 1,000

400

$37,000

$ 3,600 3,000

150 10,000 12,650 7,600

(c) Larger Column

BRIEF EXERCISE 3-13

(a) No, the trial balance is not correct, because some accounts with debit balances are listed

in the credit column and vice versa

(b)

BOURQUE LIMITED Trial Balance December 31, 2015

4,500 9,100 4,400 1,200 2,000

500

$41,700

$ 1,500 2,200 5,000 13,000 20,000

_

$41,700

Prepaid Insurance Equipment

= Accounts Payable

Bank Loan Payable +

Common Shares

Retained Earnings +

Revenues

– Expenses

– Dividends

Prepaid Insurance

Computer Equipment

= Accounts Payable +

Common Shares

Retained Earnings +

Revenues

– Expenses

– Dividends

EXERCISE 3-3

Accounts payable and

Statement of Financial Position

Position

Position

EXERCISE 3-4

(a) Basic

Analysis

The asset account Cash is increased by $11,000; the shareholders’ equity account Common Shares is increased by $11,000

(b) Equation

Analysis

Debits increase assets: debit Cash $11,000

Credits increase share capital (shareholders’ equity): credit Common Shares $11,000

account, for use in the business

(a) Basic

Analysis

The asset account Vehicles is increased by $10,000; the liability account Accounts Payable is increased by $9,000; the asset account Cash is decreased by $1,000

(b) Equation

Analysis

Assets = Liabilities + Shareholders’

Equity Cash

-$1,000

Account Payable

Vehicles +$10,000

+$9,000

(c) Debit−Credit

Analysis

Debits increase assets: debit Vehicles $10,000

Credits increase liabilities: credit Accounts Payable $9,000

Credit decrease assets: credit Cash $1,000

EXERCISE 3-4 (Continued)

(a) Basic

Analysis

The asset account Accounts Receivable is increased by $2,300;

the revenue account Service Revenue is increased by $2,300

(b) Equation

Analysis

Equity Accounts

Receivable

Service Revenue

(c) Debit−Credit

Analysis

Debits increase assets: debit Accounts Receivable $2,300

Credits increase revenues: credit Service Revenue $2,300

(a) Basic

Analysis

The expense account Advertising Expense is increased by $225;

the asset account Cash is decreased by $225

(b) Equation

Analysis

Equity Cash

Advertising Expense

(c) Debit−Credit

Analysis

Debits increase expenses: debit Advertising Expense $225

Credits decrease assets: credit Cash $225

EXERCISE 3-4 (Continued)

10

(a) Basic

Analysis

The asset account Cash is increased by $1,000; the Asset account Accounts Receivable is decreased by $1,000

(b) Equation

Analysis

Assets = Liabilities + Shareholders’

Equity Cash

+$1,000

Accounts Receivable -$1,000

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $1,000

Credits decrease assets: credit Accounts Receivable $1,000

(a) Basic

Analysis

The liability account Accounts Payable is decreased by $9,000; the asset account Cash is decreased by $9,000

(b) Equation

Analysis

Equity Cash

Accounts Payable

(c) Debit−Credit

Analysis

Debits decrease liabilities: debit Accounts Payable $9,000

Credits decrease assets: credit Cash $9,000

EXERCISE 3-4 (Continued)

performed in April

(a) Basic

Analysis

The asset account Cash is increased by $700; the liability account Unearned Revenue is increased by $700

(b) Equation

Analysis

Equity Cash

Unearned Revenue

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $700

Credits increase liabilities: credit Unearned Revenue $700

(a) Basic

Analysis

The asset account Cash is decreased by $500; the Dividends account is increased by $500

(b) Equation

Analysis

Debits increase dividends: debit Dividends $500

Credits decrease assets: credit Cash $500

EXERCISE 3-8

(a), (b), and (c)

(a) Basic

Analysis

The asset account Cash is increased by $20,000; the shareholders’ equity account Common Shares is increased by $20,000

(b) Equation

Analysis

Debits increase assets: debit Cash $20,000

Credits increase share capital (shareholders’ equity): credit Common Shares $20,000

(a) Basic

Analysis

The asset account Accounts Receivable is increased by $9,000;

the revenue account Service Revenue is increased by $9,000

(b) Equation

Analysis

Equity Accounts

Receivable

Service Revenue

(c) Debit−Credit

Analysis

Debits increase assets; debit Accounts Receivable $9,000

Credits increase revenues; credit Service Revenue $9,000

EXERCISE 3-8 (Continued)

(a), (b), and (c) (Continued)

and borrowing the balance from the bank

(a) Basic

Analysis

The asset account Equipment is increased by $12,000; the Asset account Cash is decreased by $5,000 and the liability account Bank Loan Payable increased by $7,000

(b) Equation

Analysis

Equity Cash

Bank Loan Payable -$5,000

Equipment +$12,000

+$7,000

(c) Debit−Credit

Analysis

Debits increase assets: debit Equipment $12,000

Credits decrease assets: credit Cash $5,000 Credits increase liabilities: credit Bank Loan Payable $7,000

(a) Basic

Analysis

The asset account Supplies is increased by $500; the liability account Accounts Payable is increased by $500

(b) Equation

Analysis

Equity Supplies

Accounts Payable

(c) Debit−Credit

Analysis

Debits increase assets: debit Supplies $500

Credits increase liabilities: credit Accounts Payable $500

EXERCISE 3-8 (Continued)

(a), (b), and (c) (Continued)

services to be provided next month

(a) Basic

Analysis

The asset account Cash is increased by $4,500; the liability account Unearned Revenue is increased by $4,500

(b) Equation

Analysis

Equity Cash

Unearned Revenue

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $4,500

Credits increase liabilities: credit Unearned Revenue $4,500

(a) Basic

Analysis

The liability account Accounts Payable is decreased by $500; the asset account Cash is decreased by $500

(b) Equation

Analysis

Equity Cash

Accounts Payable

(c) Debit−Credit

Analysis

Debits decrease liabilities: debit Accounts Payable $500

Credits decrease assets: credit Cash $500

EXERCISE 3-8 (Continued)

(a), (b), and (c) (Continued)

(a) Basic

Analysis

The asset account Cash is increased by $5,000; the Asset account Accounts Receivable is decreased by $5,000

(b) Equation

Analysis

Assets = Liabilities + Shareholders’

Equity Cash

+$5,000

Accounts Receivable -$5,000

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $5,000

Credits decrease assets: credit Accounts Receivable $5,000

500

4,500

500

EXERCISE 3-9

bank loan payable