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CHAPTER 3
The Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics Questions
Brief Exercises Exercises Problems
- Transaction identification. 1, 2, 3, 5 1, 2 1, 2, 3, 4, 17 1
- Nominal accounts. 4, 7
- Trial balance. 6, 10 2, 3, 4 1, 2
- Adjusting entries. 8, 11, 13, 14 3, 4, 5, 6, 7, 8, 9, 10
5, 6, 7, 8, 9, 10, 20
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12
- Financial statements. 11, 12, 15, 22, 23
1, 2, 4, 6, 7, 8
- Closing. 12 11 13, 14, 16 1, 4, 9, 10, 12
- Inventory and cost of goods sold.
9 14, 15
- Comprehensive accounting cycle.
1, 2, 6, 12
*9. Cash vs. accrual basis. 15, 16, 17 12 18, 19 11
*10. Reversing entries. 18 13 20
*11. Worksheet. 19 21, 22, 23 12
*These topics are dealt with in an Appendix to the Chapter.
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives Questions^
Brief Exercises Exercises Problems
- Understand the basic accounting information system.
1, 2, 3, 4, 5, 7
- Record and summarize basic transactions.
3, 6 1, 2, 3, 4, 5, 6, 7
1, 2, 3, 4, 9, 17
1, 10
- Identify and prepare adjusting entries. 8, 13, 14, 11
3, 4, 5, 6, 7, 8, 9, 10
5, 6, 7, 8, 9, 10, 20
2, 3, 4, 5, 6, 7, 8, 9, 10, 12
- Prepare financial statements from the adjusted trial balance.
11, 12 1, 2, 4, 6, 7, 8, 12
- Prepare closing entries. 10, 12 11 13, 14, 16 1, 4, 7, 8, 9, 10, 12
- Prepare financial statements for a merchandising company.
9 13, 15 4
*7. Differentiate the cash basis of accounting from the accrual basis of accounting.
15, 16, 17
12 18, 19 11
*8. Identify adjusting entries that may be reversed.
18 13 20
*9. Prepare a 10-column worksheet. 19 21, 22, 23 12
*These topics are dealt with in an Appendix to the Chapter.
ANSWERS TO QUESTIONS
- Examples are: (a) Payment of an accounts payable. (b) Collection of an accounts receivable from a customer. (c) Conversion of an accounts payable to a note payable. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
- Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting records because a change in assets, liabilities, or owners’/stockholders’ equity has been effected as a result of a transfer of values from one party to another. Transactions (c) and (e) are not business transactions because a transfer of values has not resulted, nor can the event be considered financial in nature and capable of being expressed in terms of money. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
- Transaction (a): Accounts Receivable (debit), Service Revenue (credit). Transaction (b): Cash (debit), Accounts Receivable (credit). Transaction (c): Supplies (debit), Accounts Payable (credit). Transaction (d): Delivery Expense (debit), Cash (credit). LO: 1, 2, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
- Revenue and expense accounts are referred to as temporary or nominal accounts because each period they are closed out to Income Summary in the closing process. Their balances are reduced to zero at the end of the accounting period; therefore, the term temporary or nominal is given to these accounts. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
- Andrea is not correct. The double-entry system means that for every debit amount there must be a credit amount and vice-versa. At least two accounts are affected and debits must equal credits. It does not mean that each transaction must be recorded twice. LO: 1, Bloom: C, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
- Although it is not absolutely necessary that a trial balance be taken periodically, it is customary and desirable. The trial balance accomplishes two principal purposes: (1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount are in the ledger. (2) It provides a list of ledger accounts and their balances which may be used in preparing the financial statements and in supplying financial data about the concern. LO: 3, Bloom: C, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
- (a) Real account; balance sheet. (b) Real account; balance sheet. (c) Inventory is generally considered a real account appearing on the balance sheet. (Note: Inventory has the elements of a nominal account when the periodic inventory system is used. It may appear on the income statement when the multiple-step format is used under a periodic inventory system.) (d) Real account; balance sheet. (e) Real account; balance sheet. (f) Nominal account; income statement. (g) Nominal account; income statement. (h) Real account; balance sheet. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA BB: Communication, AICPA FC: Reporting, AICPA PC: None
Questions Chapter 3 (Continued)
At December 31, the three days’ wages due to the employees represent a current liability. The related expense must be recorded in this period to properly reflect the expense incurred. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA FC: Reporting, AICPA PC: None
(a) In a service company, revenues are service revenues and expenses are operating expenses. In a merchandising company, revenues are sales revenues and expenses consist of cost of goods sold plus operating expenses. (b) The measurement process in a merchandising company consists of comparing the sales price of the merchandise inventory to the cost of goods sold and operating expenses. LO: 6, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA FC: Reporting, AICPA PC: None
(a) No change. (b) Before closing, balances exist in these accounts; after closing, no balances exist. (c) Before closing, balances exist in these accounts; after closing, no balances exist. (d) Before closing, a balance exists in this account exclusive of any dividends or the net income or net loss for the period; after closing, the balance is increased or decreased by the amount of net income or net loss, and decreased by dividends declared. (e) No change. LO: 5, Bloom: C, Difficulty: Simple, Time: 3-5, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
Adjusting entries are prepared prior to the preparation of financial statements in order to bring the accounts up to date and are necessary (1) to achieve a proper recognition of revenues and expenses in measuring income and (2) to achieve an accurate presentation of assets, liabilities and stockholders’ equity. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
Closing entries are prepared to transfer the balances of nominal accounts to capital (retained earnings) after the adjusting entries have been recorded and the financial statements prepared. Closing entries are necessary to reduce the balances in nominal accounts to zero in order to prepare the accounts for the next period’s transactions. LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AICPA FC: Reporting, AICPA PC: None
Cost – Salvage Value = Depreciable Cost: $4,000 – $0 = $4,000. Depreciable Cost ÷ Useful Life = Depreciation Expense For One Year $4,000 ÷ 5 years = $800 per year. The asset was used for 6 months (7/1 – 12/31), therefore 1/2-year of depreciation expense should be reported. Annual depreciation X 6/12 = amount to be reported on 2017 income statement: $800 X 6/12 = $400. LO: 3, Bloom: AP, Difficulty: Simple, Time: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
December 31 Interest Receivable ............................................................................................. 10, Interest Revenue ......................................................................................... 10, (To record accrued interest revenue on loan) Accrued expenses result from the same causes as accrued revenues. In fact, an accrued expense on the books of one company is an accrued revenue to another company. LO: 3, Bloom: AP, Difficulty: Simple, 3 Time: -5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-
July 1 Prepaid Insurance ......................................... 15, Cash........................................................ 15,
Dec. 31 Insurance Expense ....................................... 2, Prepaid Insurance ($15,000 X 1/2 X 1/3)........................... 2, LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
BRIEF EXERCISE 3-
July 1 Cash ............................................................... 15, Unearned Service Revenue................... 15,
Dec. 31 Unearned Service Revenue .......................... 2, Service Revenue ($15,000 X 1/2 X 1/3)........................... 2,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
BRIEF EXERCISE 3-
Feb. 1 Prepaid Insurance ......................................... 720, Cash........................................................ 720,
June 30 Insurance Expense ....................................... 150, Prepaid Insurance ($720,000 X 5/24) ................................ 150,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
BRIEF EXERCISE 3-
Nov. 1 Cash ............................................................... 2, Unearned Rent Revenue ....................... 2,
Dec. 31 Unearned Rent Revenue............................... 1, Rent Revenue ($2,400 X 2/3) ...................................... 1,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
- Increase in prepaid expenses
EXERCISE 3-2 (10–15 minutes)
Wanda Landowska Company Trial Balance April 30, 2017
Debit Credit
Cash ....................................................................... $ 4, Accounts Receivable ............................................ 2, Prepaid Insurance ($700 + $100) .......................... 800 Equipment.............................................................. 8, Accounts Payable ($4,500 – $100) ....................... $ 4, Property Taxes Payable ........................................ 560 Owner’s Capital ($11,200 + $1,500) ........................... 12, Owner’s Drawing.................................................... 1, Service Revenue.................................................... 6, Salaries and Wages Expense ............................... 4, Advertising Expense ($1,100 + $300) ................... 1, Property Tax Expense ($800 + $100) .................... 900
$24,350 $24,
LO: 2, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 3-3 (15–20 minutes)
The ledger accounts are reproduced below, and corrections are shown in the accounts.
Cash Accounts Payable Bal. 5,912 (4) 190 Bal. 7, (1) 450
Accounts Receivable Common Stock Bal. 5,240 (1) 450 Bal. 8,
Supplies Retained Earnings Bal. 2,967 Bal. 2,
EXERCISE 3-3 (Continued)
Equipment Service Revenue Bal. 6,100 Bal. 5, (2) 3,200 (3) 2, (5) 80
Office Expense Bal. 4,320 (2) 3,
Blues Traveler Corporation Trial Balance (corrected) April 30, 2017
Debit Credit
Cash ...................................................................... $ 6, Accounts Receivable ........................................... 4, Supplies ................................................................ 2, Equipment ............................................................. 9, Accounts Payable................................................. $ 7, Common Stock ..................................................... 8, Retained Earnings ................................................ 2, Service Revenue ................................................... 7, Office Expense ..................................................... 1, $24,349 $24,
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
The policy was purchased six months ago (August 1, 2016)
EXERCISE 3-7 (Continued)
The “T” account for salaries payable is
Salaries and Wages Payable Paid 700 Beg. Bal.? January End Bal. 800
The beginning balance is therefore
Ending balance of salaries and wages payable $ 800 Plus: Reduction of salaries and wages payable 700 Beginning balance of salaries and wages payable $1,
(d) Service revenue $2, Cash received (1,600) Unearned revenue reduced $ 400
Ending unearned revenue January 31, 2017 $ 750 Plus: Unearned revenue reduced 400 Beginning unearned revenue December 31, 2016 $1,
LO: 3, Bloom: AP, Difficulty: Complex, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 3-8 (10–15 minutes)
- Salaries and Wages Expense ......................................... 1, Salaries and Wages Payable ................................... 1,
- Utilities Expenses............................................................ 600 Accounts Payable .................................................... 600
- Interest Expense ($30,000 X 8% X 1/12) ......................... 200 Interest Payable ....................................................... 200
- Telephone and Internet Expense ................................... 117 Accounts Payable .................................................... 117
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 3-10 (25–30 minutes)
(a) 1. Aug. 31 Insurance Expense ($4,500 X 3/12) ............ 1, Prepaid Insurance ................................ 1,
- Aug. 31 Supplies Expense ($2,600 – $450) ............. 2, Supplies................................................ 2,
- Aug. 31 Depreciation Expense ................................. 1, Accumulated Depreciation— Buildings ........................................... 1, ($120,000* – $12,000 = $108,000; $108,000 X 4% = $4,320 per year; $4,320 X 1/4 = $1,080) *$120,000 X.
Aug. 31 Depreciation Expense ................................. 360 Accumulated Depreciation— Equipment ......................................... 360 ($16,000 – $1,600** = $14,400; $14,400 X 10% = $1,440; $1,440 X 1/4 = $360) **$16,000 X.
- Aug. 31 Unearned Rent Revenue ............................. 3, Rent Revenue ....................................... 3,
- Aug. 31 Salaries and Wages Expense ..................... 375 Salaries and Wages Payable ............... 375
- Aug. 31 Accounts Receivable .................................. 800 Rent Revenue ....................................... 800
- Aug. 31 Interest Expense ......................................... 1, Interest Payable ................................... 1, [($60,000 X 8%) X 1/4]
EXERCISE 3-10 (Continued)
(b) Greco Resort
- E3-1 Transaction analysis–service company. Simple 15– (minutes)
- E3-2 Corrected trial balance. Simple 10–
- E3-3 Corrected trial balance. Simple 15–
- E3-4 Corrected trial balance. Simple 10–
- E3-5 Adjusting entries. Moderate 10–
- E3-6 Adjusting entries. Moderate 10–
- E3-7 Analyze adjusted data. Complex 15–
- E3-8 Adjusting entries. Moderate 10–
- E3-9 Adjusting entries. Moderate 15–
- E3-10 Adjusting entries. Complex 25–
- E3-11 Prepare financial statements. Moderate 20–
- E3-12 Prepare financial statements. Moderate 20–
- E3-13 Closing entries. Simple 10–
- E3-14 Closing entries. Moderate 10–
- E3-15 Missing amounts. Simple 10–
- E3-16 Closing entries for a corporation. Moderate 10–
- Moderate 10– and dividend.
- *E3-18 Cash to accrual basis. Moderate 15–
- *E3-19 Cash and accrual basis. Moderate 10–
- *E3-20 Adjusting and reversing entries. Complex 20–
- *E3-21 Worksheet. Simple 10–
- *E3-22 Worksheet and balance sheet presentation. Moderate 20–
- *E3-23 Partial worksheet preparation. Moderate 10–
- P3-1 Transactions, financial statements–service company. Moderate 25–
- P3-2 Adjusting entries and financial statements. Moderate 35–
- P3-3 Adjusting entries. Moderate 25–
- P3-4 Financial statements, adjusting and closing entries. Moderate 40–
- P3-5 Adjusting entries. Moderate 15–
- P3-6 Adjusting entries and financial statements. Moderate 25–
- P3-7 Adjusting entries and financial statements. Moderate 25–
- P3-8 Adjusting entries and financial statements. Moderate 25–
- P3-9 Adjusting and closing. Moderate 30–
- P3-10 Adjusting and closing. Moderate 30–
- *P3-11 Cash and accrual basis. Moderate 35–
- *P3-12 Worksheet, balance sheet, adjusting and closing entries. Complex 40–
- BRIEF EXERCISE 3-
- May 1 Cash 4, - Common Stock 4, - 3 Equipment 1, - Accounts Payable 1,
- 13 Rent Expense - Cash
- 21 Accounts Receivable - Service Revenue
- BRIEF EXERCISE 3- LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- Aug. 2 Cash............................................................... 12, - Equipment 2, - Owner’s Capital 14, - 7 Supplies......................................................... - Accounts Payable..................................
- 12 Cash............................................................... 1, - Accounts Receivable - Service Revenue 1,
- 15 Rent Expense - Cash
- 19 Supplies Expense - Supplies ($500 – $270)
- BRIEF EXERCISE 3-
- Dec. 31 Salaries and Wages Expense....................... 4, - ($8,000 X 3/5)...................................... 4,
- Jan. 2 Salaries and Wages Payable 4, - Salaries and Wages Expense....................... 3, - Cash 8,
- BRIEF EXERCISE 3- LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
- Dec. 31 Interest Receivable - Interest Revenue
- Feb. 1 Cash............................................................... 12, - Notes Receivable 12, - Interest Receivable - Interest Revenue
- BRIEF EXERCISE 3- LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
- Aug. 31 Interest Expense - Interest Payable
- 31 Accounts Receivable 1, - Service Revenue 1,
- 31 Salaries and Wages Expense....................... - Salaries and Wages Payable
- 31 Bad Debt Expense - Allowance for Doubtful Accounts
- BRIEF EXERCISE 3-
- Depreciation Expense 2,
- Accumulated Depreciation—Equipment 2,
- Equipment $30,
- Less: Accumulated Depreciation—Equipment 2,000 $28,
- BRIEF EXERCISE 3- LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
- Sales Revenue 808,
- Interest Revenue 13,
- Income Summary 780,
- Cost of Goods Sold 556,
- Administrative Expenses 189,
- Income Tax Expense 35,
- Income Summary 42,
- Retained Earnings 18,
- *BRIEF EXERCISE 3- LO: 5, Bloom: AP, M Difficulty: oderate, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None
- (a) Cash receipts $142, - ($18,600 – $13,000) 5, + Increase in accounts receivable - Service revenue $147,
- (b) Payments for operating expenses $ 97, - Operating expenses $ 91, ($23,200 – $17,500) (5,700)
- *BRIEF EXERCISE 3-
- (a) Salaries and Wages Payable 4, - Salaries and Wages Expense 4,
- (b) Salaries and Wages Expense 7, - Cash 7,
- (c) Salaries and Wages Payable 4,
- Salaries and Wages Expense 2,
- Apr. 2 Cash 32, EXERCISE 3-1 (15–20 minutes) - Equipment 14, - Owner’s Capital 46, - 3 Supplies 2 No entry—not a transaction. - Accounts Payable - 7 Rent Expense - Cash.........................................................
- 11 Accounts Receivable 1, - Service Revenue 1,
- 12 Cash 3, - Unearned Service Revenue.................... 3,
- 17 Cash 2, - Service Revenue 2,
- 21 Insurance Expense - Cash.........................................................
- 30 Salaries and Wages Expense 1, - Cash......................................................... 1,
- 30 Supplies Expense - Supplies
- 30 Equipment 6, - Owner’s Capital 6,
- Cash ($2,870 + $180 – $65 – $65) $ 2, Debit Credit
- Accounts Receivable ($3,231 – $180) 3,
- Supplies ($800 – $500)
- Equipment ($3,800 + $500) 4,
- Accounts Payable ($2,666 – $206 – $260)........................ $ 2,
- Unearned Service Revenue ($1,200 – $325)
- Common Stock 6,
- Dividends
- Retained Earnings 3,
- Service Revenue ($2,380 + $801 [$890 – $89] + $325)..... 3,
- Salaries and Wages Expense ($3,400 + $670 – $575) 3,
- Office Expense - $15,581 $15,
- Depreciation Expense ($250 X 3) EXERCISE 3-5 (10–15 minutes)
- Accumulated Depreciation—Equipment
- Unearned Rent Revenue ($9,300 X 1/3).................... 3,
- Interest Expense........................................................
- Supplies Expense...................................................... 1,
- Supplies ($2,800 – $850) 1,
- Insurance Expense ($300 X 3)
- Accounts Receivable EXERCISE 3-6 (10–15 minutes) - Service Revenue
- Utilities Expenses - Accounts Payable
- Depreciation Expense - Accumulated Depreciation – Equipment
- Interest Expense - Interest Payable.......................................................
- Insurance Expense ($12,000 X 1/12) 1, - Prepaid Insurance 1,
- Supplies Expense ($1,600 – $500) 1, - Supplies 1,
- (a) Ending balance of supplies $ EXERCISE 3-7 (15–20 minutes)
- Add: Adjusting entry
- Deduct: Purchases
- Beginning balance of supplies $
- Amount used (6 X $400) 2, (b) Total prepaid insurance $4,800 ($400 X 12)
- Present balance $2,
- Salaries and Wages Expense 1, (c) The entry in January to record salary and wages expense was
- Salaries and Wages Payable
- August 31, Adjusted Trial Balance
- Cash $ 19, Debit Credit
- Accounts Receivable
- Prepaid Insurance ($4,500 – $1,125) 3,
- Supplies ($2,600 – $2,150)
- Land.......................................................................... 20,
- Buildings 120,
- Accumulated Depreciation—Buildings $ 1,
- Equipment 16,
- Accumulated Depreciation—Equipment................
- Accounts Payable.................................................... 4,
- Unearned Rent Revenue ($4,600 – $3,800)
- Salaries and Wages Payable
- Interest Payable 1,
- Mortgage Payable 60,
- Common Stock 91,
- Retained Earnings 9,
- Dividends 5,
- Rent Revenue ($76,200 + $3,800 + $800)................ 80,
- Salaries and Wages Expense ($44,800 + $375) 45,
- Utilities Expenses 9,
- Maintenance and Repair Expense 3,
- Insurance Expense 1,
- Supplies Expense 2,
- Depreciation Expense 1,
- Interest Expense 1, - $249,115 $249,
