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CHAPTER 3
The Accounting Information System

ASSIGNMENT CLASSIFICATION TABLE

Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP

1. Analyze the effects of 1, 2, 3, 4, 5 1, 3 1, 2, 4, 8 1A, 2A, 4A 1B, 2B, 4B 1, 3, 4,


transactions on the 6
accounting equation.

2. Define debits and credits 6, 7, 8, 9, 2, 3, 4 3, 4, 8 3A, 4A 3B, 4B 2, 4


and explain how they are 10
used to record
transactions.

3. Journalize transactions. 11, 12, 13, 5, 6, 7 5, 6, 8 4A, 5A, 4B, 5B, 3, 4, 6,


14, 15 6A, 7A, 8A 6B, 7B, 8B 7

4. Post transactions. 14, 15, 16, 8, 9, 10 7, 8, 9, 6A, 7A, 8A 6B, 7B, 8B 3, 4, 7


17, 18

5. Prepare a trial balance. 19, 20, 21, 11, 12, 13 9, 10, 11, 7A, 8A, 7B, 8B, 4, 5, 7
22, 23 12 9A, 10A, 9B, 10B,
11A 11B

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ASSIGNMENT CHARACTERISTICS TABLE

Problem Description Difficulty Time


Number Level Allotted (min.)

1A Analyze effects of transactions. Moderate 25-30

2A Analyze transactions and prepare financial Moderate 40-50


statements.

3A Identify normal balance and statement classification. Simple 20-30

4A Analyze and record transactions. Moderate 30-40

5A Record transactions. Moderate 30-40

6A Record and post transactions. Moderate 40-50

7A Record and post transactions; prepare trial balance. Moderate 40-50

8A Record and post transactions; prepare trial balance. Moderate 40-50

9A Prepare trial balance. Moderate 20-30

10A Prepare financial statements. Moderate 20-30

11A Prepare corrected trial balance. Complex 40-50

1B Analyze effects of transactions. Moderate 25-30

2B Analyze transactions and prepare financial Moderate 40-50


statements.

3B Identify normal balance and statement classification. Simple 20-30

4B Analyze and record transactions. Moderate 30-40

5B Record transactions. Moderate 30-40

6B Record and post transactions. Moderate 40-50

7B Record and post transactions; prepare trial balance. Moderate 40-50

8B Record and post transactions: prepare trial balance. Moderate 40-50

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Description Difficulty Time


Number Level Allotted (min.)
9B Prepare trial balance. Moderate 20-30

10B Preparefinancial statements. Moderate 20-30

11B Prepare corrected trial balance. Complex 40-50

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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.
(d) Paying a cash dividend to shareholders is an accounting transaction as it does affect
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).

5. (a) Decrease assets and decrease shareholders' equity (an expense has been
increased).
(b) Increase assets and increase liabilities.
(c) Increase assets and increase shareholders' equity (common shares has increased).
(d) Decrease shareholders' equity (an expense has been increased) and decrease
assets.
(e) Increase one asset (cash) and decrease another asset (accounts receivable).

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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.

8. Account (a) Normal Balance (b) Statement Classification

1. Accounts Receivable Debit balance Statement of financial position (Asset)


2. Accounts Payable Credit balance Statement of financial position (Liability)
3. Equipment Debit balance Statement of financial position (Asset)
4. Dividends Debit balance Statement of changes in equity
5. Supplies Debit balance Statement of financial position (Asset)
6. Service Revenue Credit balance Income statement (Revenue)
7. Unearned Revenue Credit balance Statement of financial position (Liability)
8. Income Tax Expense Debit balance Income statement (Expense)
9. Prepaid Rent Debit balance Statement of financial position (Asset)
10. Bank Loan Payable Credit balance Statement of financial position (Liability)

9. (a) Debit Supplies and credit Accounts Payable


(b) Debit Accounts Payable and credit Cash
(c) Debit Cash and credit Bank Loan Payable
(d) Debit Salaries Expense and credit Cash
(e) Debit Cash and credit Unearned Revenue
(f) Debit Prepaid Expense and credit Cash
(g) Debit Accounts Receivable and credit Revenue
(h) Debit Cash and credit Accounts Receivable
(i) Debit Dividends and credit Cash
(j) Debit Income Tax Expense and credit Cash

10. (a) Cash Both debit and credit entries


(b) Accounts Receivable Both debit and credit entries
(c) Dividends Debit entries only
(d) Accounts Payable Both debit and credit entries
(e) Service Revenue Credit entries only
(f) Salaries Expense Debit entries only
(g) Unearned Revenue Both debit and credit entries

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Answers to Questions (Continued)

11. (a) A general journal is a book of original entry, in which transactions are recorded in
chronological order.
(b) The general journal facilitates the recording process by documenting the debit and
credit effects on specific accounts. The general journal discloses the complete effect
of a transaction in one place, including an explanation and, where applicable,
identification of the source document. The general journal provides a chronological
record of transactions and it helps to prevent and locate errors, because the debit
and credit amounts for each entry can be quickly compared.

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.

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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.
(b) The general ledger is often arranged in the order in which accounts are presented in
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.
(b) Numbering the accounts helps identify and sort the accounts.

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.
(b) The trial balance is prepared using the account balances from the general ledger.

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.)

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Answers to Questions (Continued)


22. (a) The trial balance will not balance because two debits were posted instead of a debit
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.
(c) No, the trial balance will not balance as the amount posted as a debit is greater than
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.

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SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 3-1
Assets = Liabilities + Shareholders’ Equity
Retained Earnings
Trans- Accounts Prepaid = Accounts Unearned Common + – –
action Cash Receivable Supplies Insurance Payable Revenue + Shares Revenues Expenses Dividends
1. +$250 +$250
2. +$500 +$500
3. –$300 −$300
4. +5,000 +$5,000
5. –400 −$400
6. +500 −500
7. −250 −250
8. –100 +$100
9. +300 +$300
10. −300 +300
Total $4,750 + $0 +$250 + $100 = $0 + $0 + $5,000 + $800 – $300 – $400

TOTAL ASSETS = $5,100 TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $5,100

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BRIEF EXERCISE 3-2

(a) (b) (c)


Debit Credit Normal Statement
Effect Effect Balance Classification

1. Accounts payable Decrease Increase Credit Statement of financial


position
2. Advertising expense Increase Decrease Debit Income statement

3. Service revenue Decrease Increase Credit Income statement

4. Accounts receivable Increase Decrease Debit Statement of financial


position
5. Unearned revenue Decrease Increase Credit Statement of financial
position
6. Cash Increase Decrease Debit Statement of financial
position
7. Dividends Increase Decrease Debit Statement of changes
in equity
8. Common shares Decrease Increase Credit Statement of changes
in equity/Statement of
financial position
9. Prepaid insurance Increase Decrease Debit Statement of financial
position
10. Equipment Increase Decrease Debit Statement of financial
position
11. Retained earnings Decrease Increase Credit Statement of changes
in equity/Statement of
financial position
12. Income tax expense Increase Decrease Debit Income statement

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BRIEF EXERCISE 3-3

Transaction 1 June 1: Issued common shares to shareholders in exchange


for $2,500 cash.

(a) Basic The asset account Cash is increased by $2,500; the


Analysis shareholders’ equity account Common Shares is increased by
$2,500.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Common
Shares
+$2,500 +$2,500

(c) Debit−Credit Debits increase assets: debit Cash $2,500.


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

Transaction 2 June 2: Purchased supplies on account for $250.

(a) Basic The asset account Supplies is increased by $250; the liability
Analysis account Accounts Payable is increased by $250.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Supplies Payable
+$250 +$250

(c) Debit−Credit Debits increase assets: debit Supplies $250.


Analysis Credits increase liabilities: credit Accounts Payable $250.

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BRIEF EXERCISE 3-3 (Continued)

Transaction 3 June 12: Billed J. Kronsnoble $300 for welding work done.

(a) Basic The asset account Accounts Receivable is increased by $300;


Analysis the revenue account Service Revenue is increased by $300.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts Service
Receivable Revenue
+$300 +$300

(c) Debit−Credit Debits increase assets; debit Accounts Receivable $300.


Analysis Credits increase revenues; credit Service Revenue $300.

Transaction 4 June 22: Received cash from J. Kronsnoble for work billed on
June 12.

(a) Basic The asset account Cash is increased by $300; the Asset
Analysis account Accounts Receivable is decreased by $300.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
+$300

Accounts
Receivable
-$300

(c) Debit−Credit Debits increase assets: debit Cash $300.


Analysis Credits decrease assets: credit Accounts Receivable $300.

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BRIEF EXERCISE 3-3 (Continued)

Transaction 5 June 25: Hired an employee to start work on July 2.

(a) Basic An accounting transaction has not occurred. There is only an


Analysis agreement of employment to start on July 2.

Transaction 6 June 28: Received cash of $200 from K. Jones as a deposit for
welding work to be done in July.

(a) Basic The asset account Cash is increased by $200; the liability
Analysis account Unearned Revenue is increased by $200.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Unearned
Cash Revenue
+$200 +$200

(c) Debit−Credit Debits increase assets: debit Cash $200.


Analysis Credits increase liabilities: credit Unearned Revenue $200.

Transaction 7 June 29: Paid for supplies purchased on June 2.

(a) Basic The asset account Cash is decreased by $250; the liability
Analysis account Accounts Payable is decreased by $250.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Cash Payable
-$250 -$250

(c) Debit−Credit Debits decrease liabilities: debit Accounts Payable $250.


Analysis Credits decrease assets: credit Cash $250.

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BRIEF EXERCISE 3-3 (Continued)

Transaction 8 June 30: Paid $100 for income tax.

(a) Basic The expense account Income Tax Expense is increased by


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

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Income Tax
Cash Expense
-$100 -$100

(c) Debit−Credit Debits increase expenses: debit Income Tax Expense $100.
Analysis Credits decrease assets: credit Cash $100.

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BRIEF EXERCISE 3-4

Account Debited Account Credited


(a) (b) (c) (a) (b) (c)
Specific Specific
Transaction Basic Type Account Effect Basic Type Account Effect

1. Asset Cash Increase Shareholders’ Common Increase


Equity Shares

2. Asset Prepaid Increase Asset Cash Decrease


Rent

3. Shareholders’ Salaries Decrease Asset Cash Decrease


Equity Expense

4. Asset Accounts Increase Shareholders’ Revenue Increase


Receivable Equity

5. Asset Cash Increase Asset Accounts Decrease


Receivable

6. Asset Supplies Increase Liability Accounts Increase


Payable

7. Liability Accounts Decrease Asset Cash Decrease


Payable

8. Asset Cash Increase Liability Bank Loan Increase


Payable

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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

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BRIEF EXERCISE 3-6

June 1 Cash ....................................................... 2,500


Common Shares.......................... 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

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BRIEF EXERCISE 3-7

1. Cash ....................................................... 5,000


Common Shares.......................... 5,000

2. Prepaid Rent .......................................... 2,100


Cash ............................................ 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


Bank Loan Payable ..................... 1,000

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BRIEF EXERCISE 3-8

Accounts Receivable Accounts Payable Sales


Aug. 10 17,500 Aug. 5 (c) 6,000 Aug. 10 50,000
15 6,500 18 3,400 Aug. 12 500
Aug. 23 (a) 15,000 Aug. 29 5,800 15 45,000
Bal. 9,000 Bal. 3,600 Bal. (e) 94,500
Sept. 5 (b) 4,000 Sept. 12 7,700 Sept. 5 (f) 4,950
Sept. 15 8,000 Sept. 23 5,900 Sept. 25 450
Bal. 5,000 Bal. (d) 5,400 Bal. 99,000

(a) $17,500 + $6,500 – $9,000 = $15,000

(b) $5,000 – $9,000 + $8,000 = $4,000

(c) $3,600 + $5,800 – $3,400 = $6,000

(d) $3,600 + $7,700 – $5,900 = $5,400

(e) $50,000 – $500 + $45,000 = $94,500

(f) $99,000 + $450 – $94,500 = $4,950

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BRIEF EXERCISE 3-9


Cash

June 1 2,500 June 29 250


June 22 300 June 30 100
June 28 200
Bal. 2,650

Accounts Receivable

June 12 300 June 22 300


Bal. 0

Supplies

June 2 250

Accounts Payable

June 29 250 June 2 250


Bal. 0

Unearned Revenue
June 28 200

Common Shares

June 1 2,500

Service Revenue
June 12 300

Income Tax Expense

June 30 100

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BRIEF EXERCISE 3-10

(a)
May 5 Billed clients $3,200 for services provided on account
May 12 Collected $1,900 from customer on account
May 15 Purchased supplies on account $200
May 20 Received $2,000 from client for services provided
May 25 Paid salaries of $2,500
May 28 Paid supplier $200 on account
May 30 Paid income tax of $750

(b)

Cash
May 12 1,900 May 25 2,500
May 20 2,000 May 28 200
May 30 750
Bal. 450

Accounts Receivable
May 5 3,200 May 12 1,900
Bal. 1,300

Supplies
May 15 200

Accounts Payable
May 28 200 May 15 200
Bal. 0

Service Revenue
May 5 3,200
May 20 2,000
Bal. 5,200

Income Tax Expense


May 30 750

Salaries Expense
May 25 2,500

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BRIEF EXERCISE 3-11

CARLAND INC.
Trial Balance
June 30, 2015

Debit Credit

Cash $ 4,400
Accounts receivable 4,000
Trading investments 6,000
Equipment 17,000
Accumulated depreciation—equipment $ 3,600
Accounts payable 3,000
Unearned revenue 150
Common shares 10,000
Retained earnings 12,650
Dividends 200
Service revenue 7,600
Salaries expense 4,000
Rent expense 1,000
Income tax expense 400 _
Totals $37,000 $37,000

BRIEF EXERCISE 3-12

(a) (b) (c)


Error In Balance Difference Larger Column
1. No $ 900 Debit
2. No 1,000 Credit
3. Yes N/A N/A
4. Yes N/A N/A
5. Yes N/A N/A
6. No 1,000 Debit

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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

Debit Credit

Cash $10,000
Accounts receivable 6,500
Supplies 3,500
Accounts payable $ 1,500
Unearned revenue 2,200
Common shares 5,000
Retained earnings 13,000
Dividends 4,500
Service revenue 20,000
Salaries expense 9,100
Office expense 4,400
Supplies expense 1,200
Rent expense 2,000
Income tax expense 500 _
Totals $41,700 $41,700

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SOLUTIONS TO EXERCISES
EXERCISE 3-1

Assets Liabilities = + Shareholders’ Equity


Bank Retained Earnings
Trans- Accounts Prepaid = Accounts Loan Common + – –
action Cash Receivable Supplies Insurance Equipment Payable Payable + Shares Revenues Expenses Dividends
1. +$5,000 +$5,000
2. +$250 +$250
3. +$2,500 +$2,500
4. −100 −$100
5. +1,800 −1,800
6. −500 +$3,500 +$3,000
7. +1,200 +1,200
8. −250 −250
9. −750 −$750
10. −600 +$600
Total $5,800 + $700 +$250 + $600 + $3,500 = + $0 +$3,000 + $5,000 + $3,700 – $750 – $100

TOTAL ASSETS = $10,850 TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $10,850

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EXERCISE 3-2

(a)

Assets = Liabilities + Shareholders’ Equity


Retained Earnings
Accounts Prepaid Computer = Accounts Common + – –
Trans. Cash Receivable Insurance Equipment Payable + Shares Revenues Expenses Dividends
1. +$8,000 +$8,000
2. −$1,600 -$1,600
3. +$3,800 +$3,800
4. −300 −300
5. +20,000 +$20,000
6. −8,000 −8,000
7. −500 +$500
8. +3,000 −3,000
9. −500 −$500
10. −250 −250
Total $11,850 + $800 + $500 + $8,000 = + $0 + $20,000 + $3,800 – $2,150 – $500

TOTAL ASSETS = $21,150 TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $21,150

(b)
Revenues $3,800
Less: Expenses 2,150
Profit $1,650

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EXERCISE 3-3

(a) (b) (c)


Account Type of account Normal Balance Financial Statement
Accounts payable and Credit Statement of Financial
Liability
accrued liabilities Position
Credit Statement of Financial
Bank loan payable Liability
Position
Statement of Financial
Cash Asset Debit
Position
Statement of Changes
Dividends Dividend Debit
in Equity
Statement of Financial
Dividends payable Liability Credit
Position
Furniture, machinery, Statement of Financial
Asset Debit
and equipment Position
General and
Expense Debit Income Statement
administrative expenses
Goodwill Statement of Financial
Asset Debit
Position
Income tax expense Expense Debit Income Statement
Statement of Financial
Income taxes payable Liability Credit
Position
Debit
Interest expense Expense Income Statement
Statement of Financial
Inventories Asset Debit
Position
Statement of Financial
Prepaid expenses Asset Debit
Position
Statement of Financial
Receivables Asset Debit
Position
Revenues Revenue Credit Income Statement
Statement of Financial
Trademarks Asset Debit
Position

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EXERCISE 3-4

Transaction 1 March 2: Issued common shares for $11,000 cash.

(a) Basic The asset account Cash is increased by $11,000; the shareholders’
Analysis equity account Common Shares is increased by $11,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Common
Shares
+$11,000 +$11,000

(c) Debit−Credit Debits increase assets: debit Cash $11,000.


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

Transaction 2 March 4: Purchased used car for $1,000 cash and $9,000 on
account, for use in the business.

(a) Basic The asset account Vehicles is increased by $10,000; the liability
Analysis account Accounts Payable is increased by $9,000; the asset
account Cash is decreased by $1,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Account
-$1,000 Payable
+$9,000

Vehicles
+$10,000

(c) Debit−Credit Debits increase assets: debit Vehicles $10,000.


Analysis Credits increase liabilities: credit Accounts Payable $9,000.
Credit decrease assets: credit Cash $1,000

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EXERCISE 3-4 (Continued)

Transaction 3 March 10: Billed customers $2,300 for services performed.

(a) Basic The asset account Accounts Receivable is increased by $2,300;


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

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts Service
Receivable Revenue
+$2,300 +$2,300

(c) Debit−Credit Debits increase assets: debit Accounts Receivable $2,300.


Analysis Credits increase revenues: credit Service Revenue $2,300.

Transaction 4 March 13: Paid $225 cash to advertise business opening.

(a) Basic The expense account Advertising Expense is increased by $225;


Analysis the asset account Cash is decreased by $225.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Advertising
Cash Expense
-$225 -$225

(c) Debit−Credit Debits increase expenses: debit Advertising Expense $225.


Analysis Credits decrease assets: credit Cash $225.

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EXERCISE 3-4 (Continued)

Transaction 5 March 25: Received $1,000 cash from customers billed on March
10.

(a) Basic The asset account Cash is increased by $1,000; the Asset account
Analysis Accounts Receivable is decreased by $1,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
+$1,000

Accounts
Receivable
-$1,000

(c) Debit−Credit Debits increase assets: debit Cash $1,000.


Analysis Credits decrease assets: credit Accounts Receivable $1,000.

Transaction 6 March 27: Paid amount owing for used car purchased on March.

(a) Basic The liability account Accounts Payable is decreased by $9,000; the
Analysis asset account Cash is decreased by $9,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Cash Payable
-$9,000 -$9,000

(c) Debit−Credit Debits decrease liabilities: debit Accounts Payable $9,000.


Analysis Credits decrease assets: credit Cash $9,000.

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EXERCISE 3-4 (Continued)

Transaction 7 March 30: Received $700 cash from a customer for services to be
performed in April.

(a) Basic The asset account Cash is increased by $700; the liability account
Analysis Unearned Revenue is increased by $700.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Unearned
Cash Revenue
+$700 +$700

(c) Debit−Credit Debits increase assets: debit Cash $700.


Analysis Credits increase liabilities: credit Unearned Revenue $700.

Transaction 8 March 31: Paid dividends of $500 to shareholders.

(a) Basic The asset account Cash is decreased by $500; the Dividends
Analysis account is increased by $500.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Dividends
-$500 -$500

(c) Debit−Credit Debits increase dividends: debit Dividends $500.


Analysis Credits decrease assets: credit Cash $500.

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EXERCISE 3-5

1. Computers .............................. 8,000


Accounts Payable .............. 8,000

2. Rent Expense ......................... 1,600


Cash ................................ 1,600

3. Accounts Receivable .............. 3,800


Service Revenue ............. 3,800

4. Utilities Expense ..................... 300


Cash ................................ 300

5. Cash ....................................... 20,000


Common Shares .............. 20,000

6. Accounts Payable ................... 8,000


Cash ................................ 8,000

7. Prepaid Insurance................... 500


Cash ................................ 500

8. Cash ....................................... 3,000


Accounts Receivable ....... 3,000

9. Dividends ................................ 500


Cash ................................ 500

10. Income Tax Expense .............. 250


Cash ................................ 250

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EXERCISE 3-6

Mar. 2 Cash ........................................ 11,000


Common Shares ................. 11,000

4 Vehicles ................................... 10,000


Cash .................................. 1,000
Accounts Payable ............. 9,000

10 Accounts Receivable ............... 2,300


Service Revenue .............. 2,300

13 Advertising Expense ................ 225


Cash ................................. 225

25 Cash ........................................ 1,000


Accounts Receivable ........ 1,000

27 Accounts Payable .................... 9,000


Cash ................................. 9,000

30 Cash ........................................ 700


Unearned Revenue .......... 700

31 Dividends ................................. 500


Cash ................................. 500

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EXERCISE 3-7

Cash
Mar. 2 11,000 Mar. 4 1,000
25 1,000 13 225
30 700 27 9,000
31 500
Mar. 31 Bal. 1,975

Accounts Receivable
Mar. 10 2,300 Mar. 25 1,000
Mar. 31 Bal. 1,300

Vehicles
Mar. 4 10,000

Accounts Payable
Mar. 27 9,000 Mar. 4 9,000
Mar. 31 Bal. 0

Unearned Revenue
Mar. 30 700

Common Shares
Mar. 2 11,000

Dividends
Mar. 31 500

Service Revenue
Mar. 10 2,300

Advertising Expense
Mar. 13 225

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EXERCISE 3-8
(a), (b), and (c)

Transaction 1 Sept. 1: Issued common shares for $20,000 cash.

(a) Basic The asset account Cash is increased by $20,000; the shareholders’
Analysis equity account Common Shares is increased by $20,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Common
Shares
+$20,000 +$20,000

(c) Debit−Credit Debits increase assets: debit Cash $20,000.


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

Transaction 2 Sept.2: Performed $9,000 of services on account for a customer.

(a) Basic The asset account Accounts Receivable is increased by $9,000;


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

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts Service
Receivable Revenue
+$9,000 +$9,000

(c) Debit−Credit Debits increase assets; debit Accounts Receivable $9,000.


Analysis Credits increase revenues; credit Service Revenue $9,000.

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EXERCISE 3-8 (Continued)


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

Transaction 3 Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash


and borrowing the balance from the bank.

(a) Basic The asset account Equipment is increased by $12,000; the Asset
Analysis account Cash is decreased by $5,000 and the liability account
Bank Loan Payable increased by $7,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Bank Loan
Cash Payable
-$5,000 +$7,000

Equipment
+$12,000

(c) Debit−Credit Debits increase assets: debit Equipment $12,000.


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

Transaction 4 Sept. 10: Purchased supplies on account for $500.

(a) Basic The asset account Supplies is increased by $500; the liability
Analysis account Accounts Payable is increased by $500.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Supplies Payable
+$500 +$500

(c) Debit−Credit Debits increase assets: debit Supplies $500.


Analysis Credits increase liabilities: credit Accounts Payable $500.

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EXERCISE 3-8 (Continued)


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

Transaction 5 Sept. 25: Received $4,500 cash in advance for architectural


services to be provided next month.

(a) Basic The asset account Cash is increased by $4,500; the liability
Analysis account Unearned Revenue is increased by $4,500.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Unearned
Cash Revenue
+$4,500 +$4,500

(c) Debit−Credit Debits increase assets: debit Cash $4,500.


Analysis Credits increase liabilities: credit Unearned Revenue $4,500.

Transaction 6 Sept. 30: Paid amount owing for supplies purchased Sept. 10.

(a) Basic The liability account Accounts Payable is decreased by $500; the
Analysis asset account Cash is decreased by $500.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Cash Payable
-$500 -$500

(c) Debit−Credit Debits decrease liabilities: debit Accounts Payable $500.


Analysis Credits decrease assets: credit Cash $500.

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EXERCISE 3-8 (Continued)


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

Transaction 7 Sept. 30: Collected $5,000 on account owing from a customer.

(a) Basic The asset account Cash is increased by $5,000; the Asset account
Analysis Accounts Receivable is decreased by $5,000.

(b) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
+$5,000

Accounts
Receivable
-$5,000

(c) Debit−Credit Debits increase assets: debit Cash $5,000.


Analysis Credits decrease assets: credit Accounts Receivable $5,000.

(d) Sept. 1 Cash................................................... 20,000


Common Shares ......................... 20,000

2 Accounts Receivable.......................... 9,000


Service Revenue......................... 9,000

4 Equipment .......................................... 12,000


Cash ........................................... 5,000
Bank Loan Payable ..................... 7,000

10 Supplies ............................................. 500


Accounts Payable ....................... 500

25 Cash................................................... 4,500
Unearned Revenue ..................... 4,500

30 Accounts Payable .............................. 500


Cash ........................................... 500

30 Cash................................................... 5,000
Accounts Receivable .................. 5,000

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EXERCISE 3-8 (Continued)

(e)

Cash
Sept. 1 20,000 Sept. 4 5,000
Sept. 25 4,500 Sept. 30 500
Sept. 30 5,000
Bal. 24,000

Accounts Receivable
Sept. 2 9,000 Sept. 30 5,000
Bal. 4,000

Supplies
Sept. 10 500
Bal. 500

Equipment
Sept. 4 12,000
Bal. 12,000

Accounts Payable
Sept. 30 500 Sept. 10 500
Bal. 0

Bank Loan Payable


Sept. 4 7,000
Bal. 7,000

Unearned Revenue
Sept. 25 4,500
Bal. 4,500

Common Shares
Sept. 1 20,000
Bal. 20,000

Service Revenue
Sept. 2 9,000
Bal. 9,000

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EXERCISE 3-9

(a) Aug. 1 Issued shares in exchange for cash


Aug. 7 Provided services and was paid cash
Aug. 11 Purchased equipment with a down payment of $1,500 and the balance from a
bank loan payable
Aug. 14 Performed services on account
Aug. 16 Collected cash in advance of providing services
Aug. 28 Received a collection on account
Aug. 30 Paid salaries
Aug. 31 Paid dividends

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EXERCISE 3-9 (Continued)


(b)

Cash Common Shares

Aug. 1 3,000 Aug. 11 1,500 Aug. 1 3,000


7 1,800 30 2,000
16 900 31 500
28 700

Bal. 2,400
Dividends

Accounts Receivable Aug. 31 500

Aug. 14 1,450 Aug. 28 700

Bal. 750 Service Revenue

Aug. 7 1,800
14 1,450
Equipment
Bal. 3,250
Aug. 11 4,000

Salaries Expense
Unearned Revenue
Aug. 30 2,000
Aug. 16 900

Bank Loan Payable

Aug. 11 2,500

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EXERCISE 3-9 (Continued)

(c)

KANG, INC.
Trial Balance
August 31, 2015

Debit Credit

Cash $2,400
Accounts receivable 750
Equipment 4,000
Unearned revenue $ 900
Bank loan payable 2,500
Common shares 3,000
Dividends 500
Service revenue 3,250
Salaries expense 2,000 _
Totals $9,650 $9,650

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EXERCISE 3-10

(a) Oct. 1 Issued shares in exchange for cash


Oct. 2 Purchased equipment on account
Oct. 5 Purchased supplies for cash
Oct. 6 Performed services on account
Oct. 9 Provided services and was paid cash
Oct. 12 Made a partial payment on account
Oct. 15 Borrowed cash using a bank loan
Oct. 16 Paid dividends
Oct. 20 Received a collection on account
Oct. 20 Performed services on account
Oct. 28 Purchased advertising on account
Oct. 30 Paid rent for the month of October
Oct. 30 Paid salaries
Oct. 31 Recorded income tax owing

(b)

HOLLY CORP.
Trial Balance
October 31, 2015

Debit Credit

Cash $ 4,200
Accounts receivable 2,240
Supplies 400
Equipment 2,000
Accounts payable $ 900
Income tax payable 180
Bank loan payable 5,000
Common shares 2,000
Dividends 300
Service revenue 3,390
Salaries expense 500
Advertising expense 400
Rent expense 1,250
Income tax expense 180 0
Totals $11,470 $11,470

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EXERCISE 3-11

(a)
SPEEDY DELIVERY SERVICE, INC.
Trial Balance
July 31, 2015

Debit Credit

Cash $ 8,000
Trading investments 20,000
Accounts receivable 14,000
Prepaid insurance 200
Equipment 99,000
Accumulated depreciation—equipment $ 21,400
Accounts payable 9,500
Salaries payable 800
Bank loan payable, due 2017 39,000
Common shares 38,000
Retained earnings, Aug. 1, 2014 20,850
Dividends 800
Service revenue 75,000
Salaries expense 25,000
Depreciation expense 9,700
Rent expense 9,000
Repairs and maintenance expense 5,700
Vehicles expense 4,750
Interest expense 3,600
Insurance expense 1,800
Income tax expense 3,000 0
Totals $204,550 $204,550

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EXERCISE 3-11 (Continued)


(b)
SPEEDY DELIVERY SERVICE, INC.
Income Statement
Year Ended July 31, 2015

Revenues
Service revenue $75,000
Expenses
Salaries expense $25,000
Depreciation expense 9,700
Rent expense 9,000
Repair and maintenance expense 5,700
Vehicles expense 4,750
Interest expense 3,600
Insurance expense 1,800
Total expenses 59,550
Profit before income tax 15,450
Income tax expense 3,000
Profit $12,450

SPEEDY DELIVERY SERVICE, INC.


Statement of Changes in Equity
Year Ended July 31, 2015

Common Retained Total


Shares Earnings Equity

Balance, August 1, 2014 $27,000 $20,850 $47,850


Issued common shares 11,000 11,000
Profit 12,450 12,450
Dividends (800) (800)
Balance, July 31, 2015 $38,000 $32,500 $70,500

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EXERCISE 3-11 (Continued)


(b) (Continued)

SPEEDY DELIVERY SERVICE, INC.


Statement of Financial Position
July 31, 2015

Assets

Current assets
Cash $ 8,000
Trading investments 20,000
Accounts receivable 14,000
Prepaid insurance 200
Total current assets $ 42,200
Property, plant, and equipment
Equipment $99,000
Less: Accumulated depreciation 21,400
Total property, plant, and equipment 77,600
Total assets $119,800

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable $9,500
Salaries payable 800
Total current liabilities $ 10,300
Non-current liabilities
Bank loan payable, due 2017 39,000
Total liabilities 49,300
Shareholders' equity
Common shares $38,000
Retained earnings 32,500
Total shareholders’ equity 70,500
Total liabilities and shareholders’ equity $119,800

(c) If the amount of the retained earnings was not known, it would be more difficult to prepare
the three financial statements in part (b) above. However, the beginning balance of
retained earnings could either be derived from the trial balance or worked backwards from
a balanced statement of financial position.

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EXERCISE 3-12

(a) (b) (c)


Error In Balance Difference Larger Column

1. No $400 Debit
2. Yes 0 n/a
3. Yes 0 n/a
4. No 500 Credit
5. No 225 Debit
6. No 9 Credit

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SOLUTIONS TO PROBLEMS

PROBLEM 3-1A
(a)

Assets = Liabilities + Shareholders’ Equity


Bank Retained Earnings
Trans- Accounts = Accounts Loan Common + – –
action Cash Receivable Supplies Equipment Payable Payable + Shares Revenues Expenses Dividends
1. +$24,000 +$24,000
2. +7,000 +$7,000
3. –11,000 +$11,000
4. –1,200 –$1,200
5. –1,450 +$1,450
6. +$600 –600
7. +2,000 +$16,000 +$18,000
8. –400 –$400
9. –2,000 –2,000
10. –600 –600
11. –40 –40
12. –6,400 –6,400
13. +12,000 –12,000
14. –1,500 –1,500
Total $20,410 + $4,000 +$1,450 + $11,000 = $0 + $7,000 + $24,000 + $18,000 –$11,740 –$400

(b) TOTAL ASSETS = $36,860


TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $7,000 + $29,860 = $36,860

PROFIT = $18,000 – $11,740 = $6,260

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PROBLEM 3-2A

(a)

Assets Liabilities Shareholders’ Equity


Retained Earnings
Opening
Accounts Bank Loan Accounts Common Retained
Cash + Receivable +Supplies+Equipment= Payable + Payable + Shares + Earnings +Revenues – Expenses–Dividends

July 31 $4,000 $1,500 $500 $5,000 $4,100 $3,500 $3,400


Aug. 3 +1,200 –1,200
5 +1,300 +1,300
6 −2,700 −2,700
7 +3,000 +3,500 +$6,500
12 –400 +1,200 +800
14 –4,675 –$3,500
–900
–275
18 +3,500 –3,500
20 –500 –$500
24 +1,000 +1,000
26 +2,000 +$2,000
28 +275 –275
31 –500 $1,300 0 0 00 00 700 000 00 000 00 000 00 000 00 000 −500 00 0
$6,225+ $1,300+ $500+ $6,200= $2,000+ $2,475+ $4,800 + $3,400 + $7,500 – $5,450 – $500

TOTAL ASSETS $14,225 = TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $14,225

Note: The August 27th transaction does not affect the accounting equation and is therefore not recorded in the accounting records.

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PROBLEM 3-2A (Continued)

(b)
HILLS LEGAL SERVICES INC.
Income Statement
Month Ended August 31, 2015

Revenues
Service revenue $7,500
Expenses
Salaries expense $3,500
Rent expense 900
Advertising expense 275
Utilities expense 275
Total expenses 4,950
Profit before income tax 2,550
Income tax expense 500
Profit $2,050

HILLS LEGAL SERVICES INC.


Statement of Changes in Equity
Month Ended August 31, 2015

Common Retained
Shares Earnings Total Equity

Balance, August 1 $3,500 $3,400 $6,900


Issued common shares 1,300 1,300
Profit 2,050 2,050
Dividends 00 (500) (500)
Balance, August 31 $4,800 $4,950 $9,750

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PROBLEM 3-2A (Continued)

(b) (Continued)

HILLS LEGAL SERVICES INC.


Statement of Financial Position
August 31, 2015

Assets

Current assets
Cash $6,225
Accounts receivable 1,300
Supplies 500
Total current assets $ 8,025
Property, plant, and equipment
Equipment 6,200
Total assets $14,225

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable $2,475
Bank loan payable 2,000
Total liabilities $ 4,475
Shareholders' equity
Common shares $4,800
Retained earnings 4,950
Total shareholders’ equity 9,750
Total liabilities and shareholders' equity $14,225

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PROBLEM 3-3A
(a)
(1) (2)
Increases Normal
Account with Balance

Accounts payable and accrued liabilities Credit Credit


Accounts receivable Debit Debit
Buildings Debit Debit
Cash Debit Debit
Common shares, beginning of year Credit Credit
Cost of sales Debit Debit
Furniture and equipment Debit Debit
Income tax expense Debit Debit
Income tax payable Credit Credit
Interest expense Debit Debit
Inventories Debit Debit
Land Debit Debit
Prepaid expenses Debit Debit
Retained earnings, beginning of year Credit Credit
Sales Credit Credit
Selling, general, and administrative expenses Debit Debit

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PROBLEM 3-3A (Continued)


(b)

(1) (2)
Account Classification Financial Statement

Accounts payable and Current liabilities Statement of Financial Position


accrued liabilities
Accounts receivable Current assets Statement of Financial Position
Buildings Non-current assets (property, Statement of Financial Position
plant, and equipment)
Cash Current assets Statement of Financial Position
Common shares, beginning of N/A (see note below) Statement of Changes in Equity
year
Cost of sales Expenses Income Statement
Furniture and equipment Non-current assets (property, Statement of Financial Position
plant, and equipment)
Income tax expense Expenses Income Statement
Income tax payable Current liabilities Statement of Financial Position
Interest expense Expenses Income Statement
Inventories Current assets Statement of Financial Position
Land Non-current assets (property, Statement of Financial Position
plant, and equipment)
Prepaid expenses Current assets Statement of Financial Position
Retained earnings, beginning N/A (see note below) Statement of Changes in Equity
of year
Sales Revenues Income Statement
Selling, general, and Expenses Income Statement
administrative expenses

Note: Beginning of the year equity amounts such as opening common shares or opening
retained earnings balances are shown on the statement of changes in equity and do not appear
on the statement of financial position as only end of year amounts for equity accounts would
appear on that statement.

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PROBLEM 3-4A
(a)

Transaction 1 Feb.2: Purchased supplies on account for $600.

(1) Basic The asset account Supplies is increased by $600; the liability
Analysis account Accounts Payable is increased by $600.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Supplies Payable
+$600 +$600

(3) Debit−Credit Debits increase assets: debit Supplies $600.


Analysis Credits increase liabilities: credit Accounts Payable $600.

Transaction 2 Feb.3: Purchased equipment for $10,000 by signing a bank


loan due in three months.

(1) Basic The asset account Equipment is increased by $10,000; the


Analysis liability account Bank Loan Payable is increased by $10,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Equipment Bank Loan
+$10,000 Payable
+$10,000

(3) Debit−Credit Debits increase assets: debit Equipment $10,000.


Analysis Credits increase liabilities: credit Bank Loan Payable $10,000.

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PROBLEM 3-4A (Continued)


(a) (Continued)

Transaction 3 Feb.6: Earned service revenue of $50,000. Of this amount,


$30,000 was received in cash. The balance was on account.

(1) Basic The asset account Cash is increased by $30,000; the asset
Analysis account Accounts Receivable is increased by $20,000; the
shareholders’ equity account Service Revenue is increased by
$50,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Service
Cash Revenue
+$30,000 +$50,000

Accounts
Receivable
+$20,000

(3) Debit−Credit Debits increase assets: debit Cash $30,000.


Analysis Debits increase assets: debit Accounts Receivable $20,000.
Credits increase revenues: credit Service Revenue $50,000.

Transaction 4 Feb.13: Paid dividends of $500 to shareholders.

(1) Basic The asset account Cash is decreased by $500; the Dividends
Analysis account is increased by $500.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Dividends
-$500 -$500

(3) Debit−Credit Debits increase dividends: debit Dividends $500.


Analysis Credits decrease assets: credit Cash $500.

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PROBLEM 3-4A (Continued)

(a) (Continued)

Transaction 5 Feb. 18: Received cash of $2,000 from a customer as a deposit for
services to be provided next month.

(1) Basic The asset account Cash is increased by $2,000; the liability
Analysis account Unearned Revenue is increased by $2,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Unearned
Cash Revenue
+$2,000 +$2,000

(3) Debit−Credit Debits increase assets: debit Cash $2,000.


Analysis Credits increase liabilities: credit Unearned Revenue $2,000.

Transaction 6 Feb. 20: Paid amount owing from the supplies purchased on Feb.
2.

(1) Basic The asset account Cash is decreased by $600; the liability account
Analysis Accounts Payable is decreased by $600.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts
Cash Payable
-$600 -$600

(3) Debit−Credit Debits decrease liabilities: debit Accounts Payable $600.


Analysis Credits decrease assets: credit Cash $600.

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PROBLEM 3-4A (Continued)


(a) (Continued)

Transaction 7 Feb. 23: Collected $20,000 of the amount owing from the Feb. 6
transaction.

(1) Basic The asset account Cash is increased by $20,000; the Asset
Analysis account Accounts Receivable is decreased by $20,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
+$20,000

Accounts
Receivable
-$20,000

(3) Debit−Credit Debits increase assets: debit Cash $20,000.


Analysis Credits decrease assets: credit Accounts Receivable $20,000.

Transaction 8 Feb. 24: Paid office expenses for the month $22,000.

(1) Basic The expense account Office Expense is increased by $22,000; the
Analysis asset account Cash is decreased by $22,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Office Expense
-$22,000 -$22,000

(3) Debit−Credit Debits increase expenses: debit Office Expense $22,000.


Analysis Credits decrease assets: credit Cash $22,000.

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PROBLEM 3-4A (Continued)


(a) (Continued)

Transaction 9 Feb.27: Recorded salaries due to employees for work


performed during the month, $14,000.

(1) Basic The expense account Salaries Expense is increased by


Analysis $14,000; the liability account Salaries Payable is increased by
$14,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Salaries Salaries
Payable Expense
+$14,000 -$14,000

(3) Debit−Credit Debits increase expenses: debit Salaries Expense $14,000.


Analysis Credits increase liabilities: credit Salaries Payable $14,000.

Transaction 10 Feb. 28: Paid interest of $50 on the bank loan signed Feb. 3.

(1) Basic The expense account Interest Expense is increased by $50;


Analysis the asset account Cash is decreased by $50.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Interest
Cash Expense
-$50 -$50

(3) Debit−Credit Debits increase expenses: debit Interest Expense $50.


Analysis Credits decrease assets: credit Cash $50.

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PROBLEM 3-4A (Continued)

(b)

Feb. 2 Supplies ........................................................... 600


Accounts Payable ..................................... 600

3 Equipment ....................................................... 10,000


Bank Loan Payable ................................. 10,000

6 Cash ................................................................ 30,000


Accounts Receivable ...................................... 20,000 0
Service Revenue ...................................... 50,000

13 Dividends ......................................................... 500


Cash ......................................................... 500

18 Cash ................................................................ 2,000


Unearned Revenue .................................. 2,000

20 Accounts Payable ............................................ 600


Cash ......................................................... 600

23 Cash ................................................................ 20,000


Accounts Receivable ................................ 20,000

24 Office Expense ................................................ 22,000


Cash ......................................................... 22,000

27 Salaries Expense ............................................. 14,000


Salaries Payable ....................................... 14,000

28 Interest Expense .............................................. 50


Cash ......................................................... 50

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PROBLEM 3-5A

May 1 Cash ................................................................ 120,000


Common Shares ...................................... 120,000

4 Land ................................................................ 125,000


Buildings .......................................................... 100,000
Equipment ....................................................... 45,000
Cash ......................................................... 100,000
Mortgage Payable .................................... 170,000

4 Prepaid Insurance ........................................... 1,500


Cash ......................................................... 1,500

5 Advertising Expense ........................................ 800


Cash ......................................................... 800

6 Equipment ....................................................... 9,000


Accounts Payable .................................... 9,000

18 Cash ................................................................ 8,800


Fees Earned............................................. 8,800

20 Dividends......................................................... 1,000
Cash ......................................................... 1,000

22 Cash ................................................................ 1,200


Unearned Revenue .................................. 1,200

29 Accounts Payable ............................................ 9,000


Cash ......................................................... 9,000

30 Interest Expense ............................................. 800


Cash ......................................................... 800

30 Salaries Expense ............................................ 3,400


Cash ......................................................... 3,400

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PROBLEM 3-6A
(a)
Apr. 1 Cash ................................................................ 10,000
Equipment ....................................................... 6,000
Common Shares ...................................... 16,000

1 No entry. Not a transaction

2 Rent Expense .................................................. 950


Cash ......................................................... 950

3 Supplies .......................................................... 1,900


Accounts Payable .................................... 1,900

10 Accounts Receivable ....................................... 900


Service Revenue ...................................... 900

13 Cash ................................................................ 800


Unearned Revenue .................................. 800

20 Cash ................................................................ 1,500


Service Revenue ...................................... 1,500

21 Cash ................................................................ 500


Accounts Receivable ................................ 500

23 Office Expense ................................................ 135


Accounts Payable .................................... 135

30 Salaries Expense ............................................ 1,900


Cash ......................................................... 1,900

30 Accounts Payable............................................ 950


Cash ......................................................... 950

30 Dividends ........................................................ 500


Cash ......................................................... 500

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PROBLEM 3-6A (Continued)


(b)
Cash Common Shares

Apr. 1 10,000 Apr. 2 950 Apr. 1 16,000


Apr. 13 800 Apr. 30 1,900
Apr. 20 1,500 Apr. 30 950 Bal. 16,000
Apr. 21 500 Apr. 30 500

Bal. 8,500 Dividends

Apr. 30 500
Accounts Receivable
Bal. 500
Apr. 10 900 Apr. 21 500

Bal. 400 Service Revenue

Apr. 10 900
Supplies Apr. 20 1,500

Apr. 3 1,900 Bal. 2,400

Bal. 1,900
Salaries Expense

Equipment Apr. 30 1,900

Apr. 1 6,000 Bal. 1,900

Bal. 6,000

Accounts Payable Rent Expense

Apr. 30 950 Apr. 3 1,900 Apr. 2 950


Apr. 23 135
Bal. 950
Bal. 1,085
Office Expense
Unearned Revenue
Apr.23 135
Apr. 13 800
Bal. 135
Bal. 800

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PROBLEM 3-6A (Continued)


(c) This suggestion is not a good idea. Journals are used to record transactions. Ledgers are
not intended to be used to capture the recording of transactions, but to tabulate the effects
of transactions in separate accounts. The balances arrived at in the ledger are then used
to communicate information to the users of the financial statements. If one attempted to
omit the use of journal entries, one could not retrace the transactions as they originated in
the journal. One would only see one side of a transaction at a time by looking at an
account in the ledger. It would become very confusing and unruly to try to keep track of
transactions.

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PROBLEM 3-7A

(a) and (c)

Cash
Accounts Payable
Feb. 28 Bal. 15,000 Mar. 2 10,000
Mar. 9 16,300 Mar. 12 17,000 Mar. 12 17,000 Feb. 28 Bal. 12,000
Mar. 20 16,600 Mar. 13 12,000 Mar. 13 12,000 Mar. 2 17,000
Mar. 25 18,400 Mar. 19 950
Bal. 0
Mar. 30 1,245 Mar. 23 3,000
Mar. 27 4,200
Mar. 30 2,000
Mar. 30 3,000
Mortgage Payable
Bal. 15,395
Mar. 30 1,250 Feb. 28Bal. 118,000
Bal. 116,750
Accounts Receivable

Mar. 30 1,245
Bal. 1,245 Common Shares

Feb. 28 Bal. 40,000


Land Bal. 40,000

Feb. 28 Bal. 85,000 Retained Earnings


Bal. 85,000
Feb. 28 Bal. 27,000
Bal. 27,000
Buildings

Feb. 28 Bal. 77,000 Fees Earned


Bal. 77,000
Mar. 9 16,300
Mar. 20 16,600
Equipment Mar. 25 18,400
Bal. 51,300
Feb. 28 Bal. 20,000
Bal. 20,000

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PROBLEM 3-7A (Continued)


(a) and (c) (Continued)

Concession Revenue

Mar. 30 2,490
Bal. 2,490

Rent Expense

Mar. 2 27,000
Mar. 23 3,000
Bal. 30,000

Salaries Expense

Mar. 27 4,200
Bal. 4,200

Advertising Expense

Mar. 19 950
Bal. 950

Interest Expense

Mar. 30 750
Bal. 750

Income Tax Expense

Mar. 30 3,000
Bal. 3,000

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PROBLEM 3-7A (Continued)

(b)
Mar. 2 Rent Expense .................................................. 27,000
Accounts Payable ..................................... 17,000
Cash ......................................................... 10,000

2 No entry.

5 No entry.

9 Cash ................................................................ 16,300


Fees Earned ............................................. 16,300

12 Accounts Payable ........................................... 17,000


Cash ......................................................... 17,000

13 Accounts Payable ........................................... 12,000


Cash ......................................................... 12,000

19 Advertising Expense ........................................ 950


Cash ......................................................... 950

20 Cash ................................................................ 16,600 0


Fees Earned ............................................. 16,600

23 Rent Expense .................................................. 3,000 0


Cash ......................................................... 3,000

25 Cash ................................................................ 18,400 0


Fees Earned ............................................. 18,400

27 Salaries Expense ............................................. 4,200


Cash ......................................................... 4,200

30 Cash ................................................................ 1,245


Accounts Receivable (2,490 × 50%) ................ 1,245
Concession Revenue ................................ 2,490

30 Mortgage Payable ............................................ 1,250


Interest Expense .............................................. 750
Cash ......................................................... 2,000

30 Income Tax Expense ....................................... 3,000


Cash ......................................................... 3,000

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PROBLEM 3-7A (Continued)

(d)
THE STAR THEATRE, INC.
Trial Balance
March 31, 2015

Debit Credit

Cash $ 15,395
Accounts receivable 1,245
Land 85,000
Buildings 77,000
Equipment 20,000
Mortgage payable $116,750
Common shares 40,000
Retained earnings 27,000
Fees earned 51,300
Concession revenue 2,490
Rent expense 30,000
Salaries expense 4,200
Advertising expense 950
Interest expense 750
Income tax expense 3,000 00
Totals $237,540 $237,540

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PROBLEM 3-8A

(a) and (c)

Cash
Apr. 30 5,000 Common Shares
May 7 1,500 May 1 1,000 Apr. 30 5,000
8 1,200 4 1,100
15 800 14 1,200
Bal. 5,000
22 1,000 21 1,000
29 1,700 25 400
31 50 Retained Earnings
31 1,200 Apr. 30 11,400
31 150
Bal. 5,100 Bal. 11,400

Service Revenue
Supplies
May 8 1,200
Apr. 30 500
15 800
Bal. 500
15 700
22 1,000
Equipment
29 1,700
Apr. 30 24,000 29 600
Bal. 6,000
Bal. 24,000
Salaries Expense
Accounts Payable May 14 1,200
Apr. 30 2,100 31 1,200
May 4 1,100 May 22 700 Bal. 2,400
21 1,000 25 500
Bal. 1,200
Rent Expense
Bank Loan Payable May 1 1,000
Apr 30 10,000 Bal. 1,000

Bal. 10,000 Supplies Expense


May 22 700
Unearned Revenue Bal. 700
Apr. 30 1,000
May 15 700 May 7 1,500
Advertising Expense
29 600
May 25 500
Bal. 1,200
Bal. 500

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Bal. 50
PROBLEM 3-8A (Continued)
(a) (Continued)
Income Tax Expense
Utilities Expense
May 31 150
May 25 400
Bal. 150
Bal. 400

Interest Expense
May 31 50

(b)
May 1 Rent Expense .................................................. 1,000
Cash ......................................................... 1,000

4 Accounts Payable ............................................ 1,100


Cash ......................................................... 1,100

7 Cash ................................................................ 1,500


Unearned Revenue .................................. 1,500

8 Cash ................................................................ 1,200


Service Revenue ...................................... 1,200

14 Salaries Expense ............................................. 1,200


Cash ......................................................... 1,200

15 Cash ................................................................ 800


Service Revenue ...................................... 800

15 Unearned Revenue ......................................... 700


Service Revenue ...................................... 700

21 Accounts Payable ............................................ 1,000 0


Cash ......................................................... 1,000

22 Cash ................................................................ 1,000


Service Revenue ...................................... 1,000

22 Supplies Expense ............................................ 700


Accounts Payable ..................................... 700

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PROBLEM 3-8A (Continued)

(b) (Continued)
May 25 Advertising Expense ........................................ 500
Accounts Payable ....................................... 500

25 Utilities Expense .............................................. 400


Cash ........................................................... 400

29 Cash ................................................................ 1,700


Service Revenue ...................................... 1,700

29 Unearned Revenue .......................................... 600


Service Revenue ...................................... 600

31 Interest Expense .............................................. 50


Cash ......................................................... 50

31 Salaries Expense ............................................. 1,200


Cash ......................................................... 1,200

31 Income Tax Expense ....................................... 150


Cash ......................................................... 150

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PROBLEM 3-8A (Continued)

(d)
PAMPER ME SALON INC.
Trial Balance
May 31, 2015

Debit Credit

Cash $ 5,100
Supplies 500
Equipment 24,000
Accounts payable $ 1,200
Bank loan payable 10,000
Unearned revenue 1,200
Common shares 5,000
Retained earnings 11,400
Service revenue 6,000
Salaries expense 2,400
Rent expense 1,000
Supplies expense 700
Advertising expense 500
Utilities expense 400
Interest expense 50
Income tax expense 150
Totals $34,800 $34,800

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PROBLEM 3-9A
(a)
TAGGAR ENTERPRISES INC.
Trial Balance
June 30, 2015

Debit Credit
Cash $ 1,800
Accounts receivable 3,000
Merchandise inventory 5,100
Prepaid insurance 900
Land 7,400
Buildings 15,000
Accumulated depreciation—buildings $ 4,000
Equipment 3,000
Accumulated depreciation—equipment 1,000
Long-term investments 3,550
Accounts payable 1,500
Income tax payable 100
Mortgage payable, due 2021 15,000
Common shares 5,000
Retained earnings, July 1, 2014 6,250
Sales 25,000
Cost of goods sold 13,700
Office expense 3,300
Interest expense 100
Income tax expense 1,000
Totals $57,850 $57,850

(b) When debits equal credits in a trial balance, there is some assurance that certain types
of errors may have been caught. However, there is no guarantee that errors do not exist
because entries may have been omitted completely, duplicated or recorded to incorrect
accounts.

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PROBLEM 3-10A

TAGGAR ENTERPRISES INC.


Income Statement
Year Ended June 30, 2015

Sales $25,000
Expenses
Cost of goods sold $13,700
Office expense 3,300
Interest expense 100
Total expenses 17,100
Profit before income tax 7,900
Income tax expense 1,000
Profit $ 6,900

TAGGAR ENTERPRISES INC.


Statement of Changes in Equity
Year Ended June 30, 2015

Common Retained
Shares Earnings Total Equity

Balance, July 1, 2014 $3,000 $ 6,250 $ 9,250


Issued common shares 2,000 2,000
Profit 00 000 6,900 6,900
Balance, June 30, 2015 $5,000 $13,150 $18,150

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PROBLEM 3-10A (Continued)

TAGGAR ENTERPRISES INC.


Statement of Financial Position
June 30, 2015

Assets
Current assets
Cash $1,800
Accounts receivable 3,000
Merchandise inventory 5,100
Prepaid insurance 900
Total current assets $10,800
Long-term investments 3,550
Property, plant, and equipment
Land $ 7,400
Buildings $15,000
Less: Accumulated depreciation 4,000 11,000
Equipment $3,000
Less: Accumulated depreciation 1,000 2,000
Total property, plant, and equipment 20,400
Total assets $34,750

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $1,500
Income tax payable 100
Current portion of mortgage payable 1,250
Total current liabilities $ 2,850
Non-current liabilities
Mortgage payable 13,750
Total liabilities 16,600
Shareholders’ equity
Common shares $ 5,000
Retained earnings 13,150
Total shareholders' equity 18,150
Total liabilities and shareholders' equity $34,750

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PROBLEM 3-11A

CANTPOST LTD.
Trial Balance
June 30, 2015

Debit Credit

Cash ($1,241 + $750 – $570 − $1,000) $ 421


Accounts receivable ($2,630 – $750 + $570) 2,450
Supplies ($860 – $360) 500
Equipment ($3,000 + $360) 3,360
Accumulated depreciation—equipment $ 600
Accounts payable 2,665
Unearned revenue 1,200
Common shares 1,000
Dividends 800
Service revenue ($8,440 – $89 + $890) 9,241
Salaries expense (given) 4,300
Rent expense 1,000
Office expense 910
Depreciation expense 600
Income tax expense 365 0
Totals $14,706 $14,706

Note that the opening retained earnings balance is zero, as this is the company’s first year of
operations. The retained earnings balance given in the problem is the ending retained earnings
balance, which was included in the trial balance in error.

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PROBLEM 3-1B
(a)

Assets = Liabilities + Shareholders’ Equity


Retained Earnings
Accounts Accounts Bank Loan Common
Trans. Cash Supplies Equipment = Unearned + + – –
Receivable Payable Payable Shares
Revenue Revenues Expenses Dividends
1. +$28,000 +$28,000
2. –1,280 –$1,280
3. –4,000 +$16,000 +$12,000
4. +$700 +$700
5. +4,200 +$4,200
6. –700 –700
7. –200 –200
8. +$3,600 +3,600
9. –2,000 –2,000
10. +700 , +$700
11. +1,600 –1,600
12. –500 –$500
13. –80 –80
14. –600 –600
Total $25,140 + $2,000 + $700 + $16,000 = $0 + $12,000 + $700 + $28,000 + $7,800 –$4,160 –$500

(b) TOTAL ASSETS = $43,840


TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY = $12,700 + $31,140 = $43,840

PROFIT = $7,800 – $4,160 = $3,640

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PROBLEM 3-2B
(a)

Assets Liabilities Shareholders’ Equity


Retained Earnings
Bank Opening
Accounts Accounts Common
Cash + +Supplies+Equipment= Loan + + + Retained +Revenues–Expenses– Dividends
Receivable Payable Shares
Payable Earnings

Aug. 31 $4,500 $1,800 $350 $6,500 $3,200 $2,500 $7,450


Sept. 1 –3,200 –3,200
1 –1,200 –$1,200
3 +1,450 –1,450
5 +2,300 +2,300
8 –700 +2,050 +1,350
14 +500 +$500
15 –300 –300
25 +2,500 +$2,500
28 +3,000 +1,500 +4,500
29 –750 –750
30 +175 –175
30 –500 –$500
30 –350 0 0 0 0 0 0 0 0 –350 0
$6,750+ $2,350 + $350+ $8,550= $2,500+ $1,525+ $4,800+ $7,450+ $5,000– $2,775– $500

TOTAL ASSETS = $18,000 TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY = $18,000

Note: The transactions on September 4th (hired a part-time office assistant) and 25th (sent a statement) do not affect the accounting
equation and are therefore not recorded in the accounting records.

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PROBLEM 3-2B (Continued)

(b)
CORSO CARE CORP.
Income Statement
Month Ended September 30, 2015

Revenues
Service revenue $5,000
Expenses
Rent expense $1,200
Salaries expense 750
Advertising expense 300
Utilities expense 175
Total expenses 0 2,425
Profit before income tax 2,575
Income tax expense 350
Profit $2,225

CORSO CARE CORP.


Statement of Changes in Equity
Month Ended September 30, 2015

Common Retained
Shares Earnings Total Equity

Balance, September 1 $2,500 $7,450 $ 9,950


Issued common shares 2,300 2,300
Profit 2,225 2,225
Dividends 0 (500) (500)
Balance, September 30 $4,800 $9,175 $13,975

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PROBLEM 3-2B (Continued)

(b) (Continued)

CORSO CARE CORP.


Statement of Financial Position
September 30, 2015

Assets

Current assets
Cash $6,750
Accounts receivable 2,350
Supplies 350
Total current assets $ 9,450
Property, plant, and equipment
Equipment 8,550
Total assets $18,000

Liabilities and Shareholders' Equity

Current liabilities
Accounts payable $1,525
Bank loan payable 2,500
Total liabilities $ 4,025
Shareholders' equity
Common shares $4,800
Retained earnings 9,175
Total shareholders’ equity 13,975
Total liabilities and shareholders' equity $18,000

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PROBLEM 3-3B

(a)
(1) (2)
Increases Normal
Account with Balance

Administrative expenses Debit Debit


Buildings Debit Debit
Cost of goods sold Debit Debit
Dividends Debit Debit
Finance income Credit Credit
Fixtures and equipment Debit Debit
Goodwill Debit Debit
Income tax expense Debit Debit
Income tax payable Credit Credit
Inventories Debit Debit
Mortgage payable Credit Credit
Prepaid expenses Debit Debit
Retained earnings, beginning of year Credit Credit
Sales Credit Credit
Trade and other receivables Debit Debit
Trade payables Credit Credit

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PROBLEM 3-3B (Continued)

(b)

(1) (2)
Account Classification Financial Statement

Administrative Expenses Income Statement


expenses
Buildings Non-current assets (property, Statement of Financial Position
plant, and equipment)
Cost of goods sold Expenses Income Statement
Dividends Dividends Statement of Changes in Equity
Finance income Revenues Income Statement
Furniture and Non-current assets (property, Statement of Financial Position
equipment plant, and equipment)
Goodwill Non-current assets Statement of Financial Position
Income tax expense Expenses Income Statement
Income tax payable Current liabilities Statement of Financial Position
Inventories Current assets Statement of Financial Position
Mortgage payable Non-current liability Statement of Financial Position
Prepaid expenses Current assets Statement of Financial Position
Retained earnings, N/A (see note below) Statement of Changes in Equity
beginning of year
Sales Revenues Income Statement
Trade and other Current assets Statement of Financial Position
receivables
Trade payables Current liabilities Statement of Financial Position

Note: Beginning of the year equity account balances such as opening retained earnings are
shown on the statement of changes in equity and do not appear on the statement of financial
position as only end of year amounts for equity accounts would appear on that statement.

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PROBLEM 3-4B

(a)

Transaction 1 Jan. 2: Issued $10,000 of common shares for cash.

(1) Basic The asset account Cash is increased by $10,000; the shareholders’
Analysis equity account Common Shares account is increased by $10,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Common
Shares
+$10,000 +$10,000

(3) Debit−Credit Debits increase assets: debit Cash $10,000.


Analysis Credits increase share capital: credit Common Shares $10,000.

Transaction 2 Jan. 5: Provided services on account $2,500.

(1) Basic The asset account Accounts Receivable is increased by $2,500;


Analysis the revenue account Service Revenue is increased by $2,500.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts Service
Receivable Revenue
+$2,500 +$2,500

(3) Debit−Credit Debits increase assets: debit Accounts Receivable $2,500.


Analysis Credits increase revenues: credit Service Revenue $2,500.

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PROBLEM 3-4B (Continued)

(a) (Continued)

Transaction 3 Jan. 6: Obtained a bank loan for $30,000

(1) Basic The asset account Cash is increased by $30,000; the liability
Analysis account Bank Loan Payable is increased by $30,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Bank Loan
Cash Payable
+$30,000 +$30,000

(3) Debit−Credit Debits increase assets: debit Cash $30,000.


Analysis Credits increase liabilities: credit Bank Loan Payable $30,000.

Transaction 4 Jan. 7: Paid $40,000 to purchase a car.

(1) Basic The asset account Vehicles is increased by $40,000; the Asset
Analysis account Cash is decreased by $40,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
-$40,000

Vehicles
+$40,000

(3) Debit−Credit Debits increase assets: debit Vehicles $40,000.


Analysis Credits decrease assets: credit Cash $40,000.

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PROBLEM 3-4B (Continued)


(a) (Continued)

Transaction 5 Jan. 9: Received cash of $5,000 from a customer as a deposit for


services to be performed in the future.

(1) Basic The asset account Cash is increased by $5,000; the liability
Analysis account Unearned Revenue is increased by $5,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Unearned
Cash Revenue
+$5,000 +$5,000

(3) Debit−Credit Debits increase assets: debit Cash $5,000.


Analysis Credits increase liabilities: credit Unearned Revenue $5,000.

Transaction 6 Jan. 12: Billed customers $20,000 for services performed during
the month.

(1) Basic The asset account Accounts Receivable is increased by $20,000;


Analysis the revenue account Service Revenue is increased by $20,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts Service
Receivable Revenue
+$20,000 +$20,000

(3) Debit−Credit Debits increase assets: debit Accounts Receivable $20,000.


Analysis Credits increase revenues: credit Service Revenue $20,000.

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PROBLEM 3-4B (Continued)


(a) (Continued)

Transaction 7 Jan. 19: Paid $500 to purchase supplies.

(1) Basic The asset account Supplies is increased by $500; the Asset
Analysis account Cash is decreased by $500.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
-$500

Supplies
+$500

(3) Debit−Credit Debits increase assets: debit Supplies $500.


Analysis Credits decrease assets: credit Cash $500.

Transaction 8 Jan 20: Provided $1,500 of services to the customer who paid in
advance on January 9.

(1) Basic The liability account Unearned Revenue decreased by $1,500; the
Analysis revenue account Service Revenue is increased by $1,500.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Unearned Service
Revenue Revenue
-$1,500 +$1,500

(3) Debit−Credit Debits decrease liabilities: debit Unearned Revenue $1,500.


Analysis Credits increase revenues: credit Service Revenue $1,500.

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PROBLEM 3-4B (Continued)


(a) (Continued)

Transaction 9 Jan. 23: Collected $5,000 owing from customers from the January
12 transaction.

(1) Basic The asset account Cash is increased by $5,000; the Asset account
Analysis Accounts Receivable is decreased by $5,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash
+$5,000

Accounts
Receivable
-$5,000

(3) Debit−Credit Debits increase assets: debit Cash $5,000.


Analysis Credits decrease assets: credit Accounts Receivable $5,000.

Transaction 10 Jan 26: Received a bill for utilities of $125, due Feb. 26.

(1) Basic The expense account Utilities Expense is increased by $125; the
Analysis liability account Accounts Payable increased by $125.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Accounts Utilities
Payable Expense
+$125 -$125

(3) Debit−Credit Debits increase expenses: debit Utilities Expense $125.


Analysis Credits increase liabilities: credit Accounts Payable $125.

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PROBLEM 3-4B (Continued)


(a) (Continued)

Transaction 11 Jan. 29: Paid rent for the month $1,500.

(1) Basic The expense account Rent Expense is increased by $1,500; the
Analysis asset account Cash is decreased by $1,500.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Cash Rent Expense
-$1,500 -$1,500

(3) Debit−Credit Debits increase expenses: debit Rent Expense $1,500.


Analysis Credits decrease assets: credit Cash $1,500.

Transaction 12 Jan. 31: Paid $4,000 of salaries to employees.

(1) Basic The expense account Salaries Expense is increased by $4,000; the
Analysis asset account Cash is decreased by $4,000.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Salaries
Cash Expense
-$4,000 -$4,000

(3) Debit−Credit Debits increase expenses: debit Salaries Expense $4,000.


Analysis Credits decrease assets: credit Cash $4,000.

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PROBLEM 3-4B (Continued)


(a) (Continued)

Transaction 13 Jan 31: Paid interest of $300 on the bank loan from the Jan. 6
transaction.

(1) Basic The expense account Interest Expense is increased by $300; the
Analysis asset account Cash is decreased by $300.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Interest
Cash Expense
-$300 -$300

(3) Debit−Credit Debits increase expenses: debit Interest Expense $300.


Analysis Credits decrease assets: credit Cash $300.

Transaction14 Jan. 31: Paid income tax for the month $3,600.

(1) Basic The expense account Income Tax Expense is increased by $3,600;
Analysis the asset account Cash is decreased by $3,600.

(2) Equation Assets = Liabilities + Shareholders’


Analysis Equity
Income Tax
Cash Expense
-$3,600 -$3,600

(3) Debit−Credit Debits increase expenses: debit Income Tax Expense $3,600.
Analysis Credits decrease assets: credit Cash $3,600.

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PROBLEM 3-4B (Continued)

(b)
Jan. 2 Cash ................................................................ 10,000
Common Shares ...................................... 10,000

5 Accounts Receivable ....................................... 2,500


Service Revenue ...................................... 2,500

6 Cash ................................................................ 30,000


Bank Loan Payable .................................. 30,000

7 Vehicles ........................................................... 40,000


Cash ......................................................... 40,000

9 Cash ................................................................ 5,000


Unearned Revenue .................................. 5,000

12 Accounts Receivable ....................................... 20,000


Service Revenue ...................................... 20,000

19 Supplies........................................................... 500
Cash ......................................................... 500

20 Unearned Revenue ......................................... 1,500


Service Revenue ...................................... 1,500

23 Cash ................................................................ 5,000


Accounts Receivable ................................ 5,000

26 Utilities Expense .............................................. 125


Accounts Payable .................................... 125

29 Rent Expense .................................................. 1,500


Cash ......................................................... 1,500

31 Salaries Expense ............................................ 4,000


Cash ......................................................... 4,000

31 Interest Expense ............................................. 300


Cash ......................................................... 300

31 Income Tax Expense ....................................... 03,600


Cash ......................................................... 3,600

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PROBLEM 3-5B

Apr. 1 Cash ...................................................................... Common


100,000 Shares
Common Shares ............................................ 100,000 100,000

3 Land ...................................................................... 204,000


Buildings ................................................................ 121,000
Equipment ............................................................. 45,000
Cash ............................................................... 60,000
Bank Loan Payable ........................................ 310,000

8 Advertising Expense .............................................. 1,800


Accounts Payable .......................................... 1,800
10 Salaries Expense .................................................. 2,800
Cash ............................................................... 2,800

13 No entry as the accounting equation is not


affected.

14 Prepaid Insurance ................................................ 5,500


Cash .............................................................. 5,500

17 Dividends.............................................................. 600
Cash .............................................................. 600

20 Cash ..................................................................... 10,600


Fees Earned.................................................. 10,600

30 Accounts Payable ................................................. 1,800


Cash .............................................................. 1,800

30 Interest Expense .................................................. 2,000


Cash .............................................................. 2,000

30 Income Tax Expense ............................................ 800


Cash .............................................................. 800

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PROBLEM 3-6B
(a) May 1 Cash ........................................................................... 20,000
Common Shares .................................................. 20,000

1 Rent Expense ............................................................. 950


Cash .................................................................... 950

4 No entry. Not an accounting transaction.

4 Supplies .............................................................. 750


Accounts Payable ........................................ 750

11 Accounts Receivable .......................................... 2,725


Service Revenue ......................................... 2,725

12 Cash ................................................................... 3,500


Unearned Revenue...................................... 3,500

15 Cash ................................................................... 2,350


Service Revenue ......................................... 2,350

20 Cash ................................................................... 1,725


Accounts Receivable ................................... 1,725

22 Accounts Payable ($750 × 1/3) ........................... 250 ,


Cash ............................................................ 250

25 Office Expense ................................................... 275


Accounts Payable ........................................ 275

29 Salaries Expense ................................................ 2,000


Cash ............................................................ 2,000

29 Income Tax Expense .......................................... 300


Cash ............................................................ 300

29 Dividends ............................................................ 250


Cash ............................................................ 250

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PROBLEM 3-6B (Continued)

(b)
Cash

May 1 20,000 May 1 950


12 3,500 22 250
15 2,350 29 2,000
20 1,725 29 300
29 250
Bal. 23,825

Accounts Receivable

May 11 2,725 May 20 1,725


Bal. 1,000

Supplies

May 4 750
Bal. 750

Accounts Payable

May 22 250 May 4 750


25 275
Bal. 775

Unearned Revenue

May 12 3,500
Bal. 3,500

Common Shares

May 1 20,000
Bal. 20,000

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PROBLEM 3-6B (Continued)

Dividends

May 29 250
Bal. 250

Service Revenue

May 11 2,725
15 2,350
Bal. 5,075

Salaries Expense

May 29 2,000
Bal. 2,000

Rent Expense

May 1 950
Bal. 950

Office Expense

May 25 275
Bal. 275

Income Tax Expense

May 29 300
Bal. 300

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PROBLEM 3-6B (Continued)


(c) This suggestion is not a good idea. Journals are used to record transactions. Ledgers
are not intended to be used to capture the recording of transactions, but to tabulate the
effects of transactions in separate accounts. The balances arrived at in the ledger are
then used to communicate information to the users of the financial statements. If one
attempted to omit the use of journal entries, one could not retrace the transactions as
they originated in the journal. One would only see one side of a transaction at a time by
looking at an account in the ledger. It would become very confusing and unruly to try to
keep track of transactions.

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PROBLEM 3-7B

(a) and (c)

Cash Bal. 123,000


Mar. 31 Bal. 6,000 Common Shares
Apr. 11 1,950 Apr. 2 800 Mar. 31 Bal. 50,000
Apr. 25 7,300 Apr. 3 620 Bal. 50,000
Apr. 30 560 Apr. 16 2,850
Apr. 17 2,800 Retained Earnings
Apr. 26 1,900 Mar. 31 Bal. 31,000
Apr. 27 700 Bal. 31,000
Apr. 30 1,000
Bal. 5,140 Fees Earned
Apr. 11 1,950
Accounts Receivable Apr. 25 7,300
Apr. 30 560 Bal. 9,250
Bal. 560
Concession Revenue
Prepaid Rent Apr. 30 1,120
Apr. 27 700 Bal. 1,120
Bal. 700
Salaries Expense
Land Apr. 26 1,900
Mar. 31 Bal. 100,000 Bal. 1,900
Bal. 100,000
Rent Expense
Buildings
Apr. 2 800
Mar. 31 Bal. 80,000 Apr. 20 750
Bal. 80,000 Bal. 1,550
Equipment Advertising Expense
Mar. 31 Bal. 25,000 Apr. 3 620
Bal. 25,000 Bal. 620
Accounts Payable Interest Expense
Mar. 31 Bal. 5,000 Apr. 16 850
Apr. 17 2,800 Apr. 20 750
Bal. 850
Bal. 2,950
Income Tax Expense
Mortgage Payable
Apr. 30 1,000
Mar. 31 Bal. 125,000
Bal. 1,000
Apr. 16 2,000

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PROBLEM 3-7B (Continued)

(b)

Apr. 2 Rent Expense.............................................................. 800


Cash .................................................................... 800

3 Advertising Expense ................................................... 620


Cash .................................................................... 620

3 No entry, not a transaction.

6 No entry, not a transaction.

11 Cash............................................................................ 1,950
Fees Earned ........................................................ 1,950

16 Mortgage Payable ....................................................... 2,000


Interest Expense ......................................................... 850
Cash .................................................................... 2,850

17 Accounts Payable ....................................................... 2,800


Cash .................................................................... 2,800

20 Rent Expense.............................................................. 750


Accounts Payable ................................................ 750

25 Cash............................................................................ 7,300
Fees Earned ........................................................ 7,300

26 Salaries Expense ........................................................ 1,900


Cash .................................................................... 1,900

27 Prepaid Rent ............................................................... 700


Cash .................................................................... 700

30 Cash............................................................................ 560
Accounts Receivable................................................... 560
Concession Revenue (20% × $5,600) ................. 1,120

30 Income Tax Expense .................................................. 1,000


Cash .................................................................... 1,000

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PROBLEM 3-7B (Continued)


(d) LAKE THEATRE, INC.
Trial Balance
April 30, 2015

Debit Credit

Cash $ 5,140
Accounts receivable 560
Prepaid rent 700
Land 100,000
Buildings 80,000
Equipment 25,000
Accounts payable $ 2,950
Mortgage payable 123,000
Common shares 50,000
Retained earnings 31,000
Fees earned 9,250
Concession revenue 1,120
Salaries expense 1,900
Rent expense 1,550
Advertising expense 620
Interest expense 850
Income tax expense 1,000 0000 000
Totals $217,320 $217,320

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PROBLEM 3-8B

(a) and (c)

Cash Retained Earnings


Apr. 30 Bal. 23,000 Apr. 30 Bal. 6,000
May 29 2,200 May 4 7,200 Bal. 6,000
May 9 500
May 11 500 Fees Earned
May 15 1,000 May 29 17,500
May 18 7,200 Bal. 17,500
May 29 200
May 29 300 Rent Expense
May 29 1,000 May 4 7,200
May 31 1,100 May 18 7,200
Bal. 6,200 Bal. 14,400
Equipment Salaries Expense
Apr. 30 Bal. 2,000 May 15 1,000
Bal. 2,000 May 29 1,000
Bal. 2,000
Accounts Payable
Apr 30 Bal. 500 Advertising Expense
May 9 500 May 21 100 May 11 500
Bal. 100 29 300
Bal. 800
Unearned Revenue
Apr 30 Bal. 17,500 Supplies Expense
May 29 17,500 May 29 2,200 May 29 200
Bal. 2,200 Bal. 200
Common Shares Office Expense
Apr. 30 Bal. 1,000 May 21 100
Bal. 1,000 Bal. 100

Income Tax Expense


May 31 1,100
Bal. 1,100

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PROBLEM 3-8B (Continued)


(b)

May 4 Rent Expense .............................................................. 7,200


Cash ..................................................................... 7,200

9 Accounts Payable ........................................................ 500


Cash ..................................................................... 500

11 No entry. Not a transaction.

11 Advertising Expense .................................................... 500


Cash ..................................................................... 500

15 Salaries Expense......................................................... 1,000


Cash ..................................................................... 1,000

18 Rent Expense .............................................................. 7,200


Cash ..................................................................... 7,200

21 Office Expense ............................................................ 100


Accounts Payable................................................. 100

29 Unearned Revenue ..................................................... 17,500


Fees Earned ......................................................... 17,500

29 Supplies Expense ........................................................ 200


Cash ..................................................................... 200

29 Cash ............................................................................ 2,200


Unearned Revenue .............................................. 2,200

29 Advertising Expense .................................................... 300


Cash ..................................................................... 300

29 Salaries Expense......................................................... 1,000


Cash ..................................................................... 1,000

31 Income Tax Expense ................................................... 1,100


Cash ..................................................................... 1,100

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PROBLEM 3-8B (Continued)


(d) KG SPRING SKATING SCHOOL INC.
Trial Balance
May 31, 2015

Debit Credit

Cash $ 6,200
Equipment 2,000
Accounts payable $ 100
Unearned revenue 2,200
Common shares 1,000
Retained earnings 6,000
Fees earned 17,500
Rent expense 14,400
Salaries expense 2,000
Advertising expense 800
Supplies expense 200
Office expense 100
Income tax expense 1,100 _
Totals $26,800 $26,800

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PROBLEM 3-9B

(a)
ASIAN IMPORTERS LIMITED
Trial Balance
January 31, 2015
(thousands)

Debit Credit

Cash $ 6,000
Accounts receivable 30,200
Merchandise inventory 74,250
Prepaid insurance 3,950
Land 42,500
Buildings 39,500
Accumulated depreciation—buildings $ 13,000
Equipment 10,900
Accumulated depreciation—equipment 3,600
Goodwill 7,600
Accounts payable 46,300
Other current liabilities 12,200
Bank loan payable (due 2018) 10,050
Mortgage payable 19,750
Common shares 32,900
Retained earnings, February 1, 2014 37,050
Dividends 1,850
Sales 370,000
Cost of goods sold 244,200
Office expense 67,750
Interest expense 2,150
Income tax expense 14,000 00000 0
Totals $544,850 $544,850

(b) When debits equal credits in a trial balance, there is some assurance that certain types
of errors may have been caught. However, there is no guarantee that errors do not exist
because entries may have been omitted completely, duplicated or recorded to incorrect
accounts.

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PROBLEM 3-10B

ASIAN IMPORTERS LIMITED


Income Statement
Year Ended January 31, 2015
(thousands)

Revenues
Sales $370,000
Expenses
Cost of goods sold $244,200
Office expense 67,750
Interest expense 2,150
Total expenses 314,100
Profit before income tax 55,900
Income tax expense 14,000
Profit $ 41,900

ASIAN IMPORTERS LIMITED


Statement of Changes in Equity
Year Ended January 31, 2015

Common Retained
Shares Earnings Total Equity

Balance, February 1, 2014 $20,000 $37,050 $ 57,050


Issued common shares 12,900 12,900
Profit 41,900 41,900

Dividends 000 000 (1,850) (1,850)


Balance, January 31, 2015 $32,900 $77,100 $110,000

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PROBLEM 3-10B (Continued)

ASIAN IMPORTERS LIMITED


Statement of Financial Position
January 31, 2015
(thousands)

Assets
Current assets
Cash $ 6,000
Accounts receivable 30,200
Merchandise inventory 74,250
Prepaid expenses 3,950
Total current assets $114,400
Property, plant, and equipment
Land $42,500
Buildings $39,500
Less: Accumulated depreciation 13,000 26,500
Equipment $10,900
Less: Accumulated depreciation 3,600 _7,300 76,300
Goodwill 7,600
Total assets $198,300

Liabilities and Shareholders' Equity


Liabilities
Current liabilities
Accounts payable $ 46,300
Mortgage payable 6,300
Other current liabilities 12,200
Total current liabilities 64,800
Non-current liabilities
Mortgage payable ($19,750 − $6,300) $13,450
Bank loan payable 10,050
Total non-current liabilities 23,500
Total liabilities 88,300
Shareholders' equity
Common shares $32,900
Retained earnings 77,100
Total shareholders’ equity 110,000
Total liabilities and shareholders’ equity $198,300

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PROBLEM 3-11B

MESSED UP LTD.
Trial Balance
May 31, 2015

Debit Credit

Cash ($2,997 + $120) $ 3,117


Accounts receivable 2,630
Prepaid insurance (+$100) 100
Equipment ($9,200 + $2,000) 11,200
Accumulated depreciation—equipment $ 4,200
Accounts payable ($4,600 + $100 + $120) 4,820
Bank loan payable (+$2,000) 2,000
Common shares 4,250
Dividends (+$750) 750
Service revenue ($14,529 –$14,529 + $14,259) 14,259
Salaries expense ($8,150 – $750) 7,400
Advertising expense 1,132
Depreciation expense 2,100
Insurance expense 600
Income tax expense ($400 + $100) 500 0
Totals $29,529 $29,529

Note that the opening retained earnings balance is zero, as this is the company’s first year of
operations. The retained earnings balance given in the problem is the ending retained earnings
balance, which was included in the trial balance in error.

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BYP 3-1 FINANCIAL REPORTING

(a) and (b)

(a) (b)
Type of Increase Decrease Normal
Account account with with Balance
Accounts payable and Credit Debit Credit
Liability
accrued liabilities
Accounts receivable Asset Debit Credit Debit
Cash Asset Debit Credit Debit
Shareholder’s Equity
Dividends Debit Credit Debit
(dividend)
Shareholders’ Equity
Income tax expense Debit Credit Debit
(expense)
Inventory Asset Debit Credit Debit
Land Asset Debit Credit Debit
Shareholders’ Equity Credit Debit Credit
Sales
(revenue)

(c)
1. Dividends are increased (debited) and Cash is decreased (credited)
2. Income Tax Expense is increased (debited) or Income Tax Payable decreased
(credited) and Cash is decreased (credited)
3. Inventory is increased(debited) and Accounts Payable is increased (credited)
4. Land is increased (debited) and Bank Loan Payable is increased (credited)
5. Accounts Receivable is increased (debited) and Sales is increased (credited)

(d)

Account Financial Statement


Accounts payable and accrued liabilities Balance Sheet
Accounts receivable Balance Sheet
Cash Balance Sheet
Dividends Statement of Changes in Shareholders’ Equity
Income tax expense Statement of Earnings
Inventory Balance Sheet
Land Balance Sheet
Sales Statement of Earnings

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BYP 3-2 COMPARATIVE ANALYSIS


(a) Shoppers Drug Mart ($ in thousands)

Total Assets = Total Liabilities + Shareholder's Equity


$1,431,315 Share Capital
10,856 Contributed Surplus
(35,192) Accumulated Other Comprehensive Loss
2,916,348 Retained Earnings
$7,473,721 = $3,150,394 + $4,323,327

(b) Jean Coutu ($ in millions)

Total Assets = Total Liabilities + Shareholder's Equity


$ 537.1 Capital Stock
(2.2) Treasury Stock
1.7 Contributed Surplus
Change in fair value of the investment in
40.8 Rite Aid
533.4 Retained Earnings
$1,392.7 = $281.9 + $1,110.8

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BYP 3-3 COMPARING IFRS AND ASPE


(a) CREIT (Canadian Real Estate Investment Trust) is a public company which trades its
shares on a public exchange and therefore it is required to prepare its financial statements
in accordance with IFRS. First Pro Shopping Centres (First Pro) is a privately held
company and therefore it has the option to prepare its financial statements in accordance
with either IFRS or ASPE.

(b) The users of CREIT (Canadian Real Estate Investment Trust) financial statements would
include the shareholders of the company, potential investors, management, lenders,
customers, competitors, and tax authorities. The users of First Pro’s financial statements
would be similar to those of CREIT. However, since it is a privately held company there
would be fewer shareholders and they would likely be more actively involved in the day to
day management of First Pro. Because of this, First Pro would not be required to disclose
its financial results publicly and users such as competitors and customers would not have
access to the financial results.

Different users will have different information needs and this will influence the type of
accounting standards used by the company. For example, at First Pro the shareholder’s
will have an intimate knowledge of the operations and would not need the additional
disclosures required by IFRS. At CREIT, the shareholders are not actively involved in the
business and would need the additional disclosures in order to make the financial
information more transparent and to allow users to properly assess the performance of the
business. Consequently, there is much more disclosed in the notes to the financial
statements when a company is complying with IFRS.

(c) CREIT would likely have more a sophisticated reporting system for the following reasons:

- Its operations are in Canada and in the U.S., and therefore it would need to
collect information in a variety of currencies.
- It must comply with IFRS and therefore it would need to collect and report
additional information that would not be required under ASPE.
- It is required to disclose its financial statements to the public within specific timing
deadlines and therefore must collect information in a very efficient manner.

(d) No, it would be very difficult to collect the necessary information without a journal or
ledger. Companies of almost any size will use a journal and ledger as the foundation of
their accounting records.

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BYP 3-4 CRITICAL THINKING CASE


(a)

Total assets = $42,000 Total liabilities and shareholders’ equity = $42,000

(b) A spreadsheet can help, in a small business like Uncle Bob’s Repairs, to organize
information. However, it lacks the date, specific account title for multiple expenses, and
explanation for each entry that one would find in a traditional general journal. It could
assist in posting, although again it lacks any cross-referencing to allow transactions to be
traced back to the source if required. Finally, use of a spreadsheet, while convenient for
very small businesses, would be limiting in terms of growth in the number of accounts and
transactions.

(c)
UNCLE BOB'S REPAIRS LTD.
Income Statement
Year Ended August 31, 2015

Service revenue $229,400


Expenses
Salaries expense $120,000
Rent expense 42,000
Office expense 36,400 198,400
Profit before income tax 31,000
Income tax expense 6,200
Profit $ 24,800

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BYP 3-4 (Continued)


(c) (Continued)

UNCLE BOB'S REPAIRS LTD.


Statement of Changes in Equity
Year Ended August 31, 2015

Common Retained Total


Shares Earnings Equity
Balance, September 1 $ 0 $ 0 $ 0
Issued common shares 10,000 10,000
Profit 24,800 24,800
Dividends 00 0000 (1,000) (1,000)
Balance, August 31 $10,000 $23,800 $33,800

UNCLE BOB'S REPAIRS LTD.


Statement of Financial Position
August 31, 2015

Current assets
Cash $ 3,100
Accounts receivable 39,400
Prepaid rent 3,500
Total assets $46,000

Current liabilities
Accounts payable $ 4,000
Income tax payable 6,200
Unearned revenue 2,000
Total liabilities $12,200
Shareholders' equity
Common shares $10,000
Retained earnings 23,800
Total shareholders’ equity 33,800
Total liabilities and shareholders’ equity $46,000

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BYP 3-4 (Continued)


(d) Five of the cash transactions relate to operating activities:

Cash collected from customers $190,000


Payments to the landlord (45,500)
Salaries paid (120,000)
Payments for office expenses (32,400)
Customer advances 2,000
Total effect on cash flow $ (5,900)

Uncle Bob would not be pleased to find out that operating cash flows were not positive.
This can often happen during the first year that a company operates.

The other two cash transactions not shown above are financing activities: the issue of
common shares for $10,000 and the payment of dividends for $1,000. The net increase
to cash of $9,000 allowed the company to have a positive cash balance $3,100 (−$5,900
+ $9,000) at the end of the year.

(e) The bank would want collateral for any loan given to the company. Usually such
collateral consists of property, plant, or equipment and this company has none of these.
It may be possible to secure a loan with accounts receivable but the company did not
have this type of asset when it was first formed.

(f) No, the company does not have enough cash to pay the income tax. The company
would have to collect some accounts receivable if it hoped to pay the income tax.

(g) The government levies income tax on corporations which are considered legal entities
separate from their shareholders. Uncle Bob would pay income tax only on the dividends
he received from the company.

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BYP 3-5 ETHICS CASE

Note to instructors: All of the material supplementing this group activity, including a suggested
solution, can be found in the Collaborative Learning section of the Instructor Resource site
accompanying this textbook as well as in the Prepare and Present section of WileyPLUS.

(a) The stakeholders in this situation are:

Ron Hollister
The other students in the group who will be graded for Ron’s work
The other students in the class
The professor
The College or University attended by Ron
Future employers of the graduates of the school

(b) By adding $810 to the General and Administrative Expense account, the account total is
intentionally misstated. By not locating the error causing the imbalance, some other
account or accounts may also be misstated by a net amount of $810. Although the
assignment will not affect external users of a real financial report, it is intended to resemble
a real life situation and Ron’s reaction, had it been in a real life situation, is unethical. Ron
did not advise his fellow team members of the action he has taken to avoid detection. They
will be affected by his actions and had no means of agreeing to the strategy taken to
address the problem. The adding of the $810 to the General and Administrative Expense
account is not by itself unethical but his failure to inform other group members that he was
changing amounts that they had prepared is wrong. Although Ron is not likely in breach of
any rule or directive issued by the school concerning academic integrity, the professor and
the other group members will not agree with the strategy used by Ron. They will wonder if
this is the type of action Ron would take while at a future job. Such actions would then
affect others who are not part of the school community and the reputation of the school
would be diminished. This in turn could affect society’s opinion of the past and future
graduates of the school.

(c) Ron's alternatives are:


1. Discuss the situation with the teammates and reach a consensus that it is better to
miss the deadline but find the error causing the imbalance and suffer the
corresponding penalty for submitting the assignment late.
2. Discuss the situation with teammates and reach a consensus to tell the professor of
the imbalance and ask for an extension of time or suffer the consequences.
3. Discuss the situation with teammates and potentially get their assistance to locate the
error causing the imbalance as a team effort so that the assignment can still submitted
by the deadline.

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BYP 3-5 (Continued)

(d) External users of the financial information prepared by Ron could potentially be affected by
the errors that remain undetected. It is highly likely that another account is wrong on the
financial statements. The consequences are more far reaching and so the behaviour is
more serious. Deception for personal benefit is clearly viewed as unethical.

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BYP 3-6 “ALL ABOUT YOU” ACTIVITY


(a) It is important to keep your personal and financial documents, such as passports, bank
account information, credit cards, insurance policies, and income tax information, up to date
so that they are current and accessible if you wish to travel, apply for a job, loan, or bank
account, pay bills on time, prepare your income tax return, and so on.

(b) A system can be organized in different ways. The system can make use of computers, filing
cabinets, and/or a safety deposit box. Many individuals use a combination of all three of
these systems.

(c) You must report the lost documentation to cancel and replace it. Cancelling the lost
information is critical to help avoid identify theft. Steps to take include:
 Contact your bank for lost credit card information
 Contact the local police to report the lost wallet
 Contact the appropriate retailer to report other lost store credit cards
 Contact the appropriate ministry of transportation office for a replacement drivers
license
 Contact the appropriate ministry for a replacement birth certificate
 Contact Citizenship and Immigration Canada for details in replacing a citizenship
certificate
 Contact the appropriate department responsible for health to replace your health card
 Contact Passport Canada to replace a passport
 Apply for a replacement social insurance number and card.

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BYP 3-7 SERIAL CASE


(b)

June 2 Prepaid Insurance ........................................................ 15,360


Cash ........................................................................ 15,360

5 Supplies ........................................................................ 2,500


Accounts Payable .................................................... 2,500

16 Equipment .................................................................... 2,520


Cash ........................................................................ 2,520

18 Cash ............................................................................. 500


Unearned Revenue.................................................. 500

19 Cash ............................................................................. 300


Unearned Revenue ...................................................... 100
Sales........................................................................ 400

20 No entry. Not an accounting transaction.

23 Accounts Receivable .................................................... 2,040


Sales........................................................................ 2,040

27 Utilities Expense ........................................................... 100


Accounts Payable .................................................... 100

30 Salaries Expense.......................................................... 3,250


Cash ........................................................................ 3,250

30 Accounts Receivable .................................................... 2,550


Sales........................................................................ 2,550

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BYP 3-7 (Continued)


(a) and (c)

Cash Equipment
June Bal. 42,000
June Bal. 39,004 16 2,520
18 500 June 2 15,360 Bal. 44,520
19 300 16 2,520
30 3,250 Accumulated Depreciation—Equipment
Bal. 18,674 June Bal. 14,000

Accounts Receivable Vehicles


June Bal. 5,900 June Bal. 52,500
23 2,040
30 2,550 Accounts Payable
Bal. 10,490 June Bal. 3,540
5 2,500
Merchandise Inventory 27 100
June Bal. 16,250 Bal. 6,140

Unearned Revenue
Supplies June 19 100 June Bal. 100
June Bal. 1,875 18 500
5 2,500 Bal. 500
Bal. 4,375
Bank Loan Payable
Prepaid Insurance June Bal. 22,500
June Bal. 12,000
2 15,360 Mortgage Payable
Bal. 27,360 June Bal. 53,200

Land Common Shares


June Bal. 100,000 June Bal. 300

Buildings Retained Earnings


June Bal. 165,000 June Bal. 66,788

Accumulated Depreciation—Buildings Dividends


June Bal. 137,500 June Bal. 30,000

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BYP 3-7 (Continued)

(a) and (c) (Continued)

Rent Revenue
June Bal. 6,000

Sales
June Bal. 638,768
19 400
23 2,040
30 2,550
Bal. 643,758

Sales Returns and Allowances


June Bal. 5,000

Cost of Goods Sold


June Bal. 102,386

Salaries Expense
June Bal. 287,532
30 3,250
Bal. 290,782

Freight Out
June Bal. 18,000

Utilities Expense
June Bal. 12,000
27 100
Bal. 12,100

Advertising Expense
June Bal. 9,000

Property Tax Expense


June Bal. 5,950

Interest Expense
June Bal. 5,299

Income Tax Expense


June Bal. 33,000

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BYP 3-7 (Continued)

(c)
KOEBEL’S FAMILY BAKERY LTD.
Trial Balance
June 30, 2014
Debit Credit
Cash $18,674
Accounts receivable 10,490
Merchandise inventory 16,250
Supplies 4,375
Prepaid insurance 27,360
Land 100,000
Buildings 165,000
Accumulated depreciation—buildings $137,500
Equipment 44,520
Accumulated depreciation—equipment 14,000
Vehicles 52,500
Accounts payable 6,140
Unearned revenue 500
Bank loan payable 22,500
Mortgage payable 53,200
Common shares 300
Retained earnings 66,788
Dividends 30,000
Rent revenue 6,000
Sales 643,758
Sales returns and allowances 5,000
Cost of goods sold 102,386
Salaries expense 290,782
Freight out 18,000
Utilities expense 12,100
Advertising expense 9,000
Property tax expense 5,950
Interest expense 5,299
Income tax expense 33,000 00
Total $950,686 $950,686

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COMPREHENSIVE CASE: CHAPTERS 1 – 3


(a)

Date Account Titles Ref. Debit Credit

Jan. 2 Cash .......................................................................................................................


1000 15,000
Common Shares (1,000 × $15) ......................................................................
4000 15,000

3 Cash .......................................................................................................................
1000 50,000
Bank Loan Payable ........................................................................................
3100 50,000

4 Rent Expense .........................................................................................................


7400 3,000
Cash...............................................................................................................
1000 3,000

5 Equipment ..............................................................................................................
2000 40,000
Cash...............................................................................................................
1000 20,000
Accounts Payable ..........................................................................................
3000 20,000

10 Advertising Expense ...............................................................................................


7000 500
Cash..........................................................................................................
1000 500 t

11 Supplies ..................................................................................................................
1200 1,000
Accounts Payable ..........................................................................................
3000 1,000

13 Advertising Expense ...............................................................................................


7000 3,000
Cash..........................................................................................................
1000 3,000 t

15 Salaries Expense ....................................................................................................


7100 7,500
Cash...............................................................................................................
1000 7,500

17 Accounts Receivable .............................................................................................


1100 15,000
Service Revenue .......................................................................................
5000 15,000 t

20 Office Expense ......................................................................................................


7300 1,000
Cash ..........................................................................................................
1000 1,000 t

24 Cash ......................................................................................................................
1000 10,000
Accounts Receivable .................................................................................
1100 10,000 t

30 Prepaid Insurance ..................................................................................................


1300 6,000
Cash ................................................... 1000 6,000

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COMPREHENSIVE CASE: CHAPTERS 1 – 3 (Continued)


(a) (Continued)

Date Account Titles Ref. Debit Credit

Jan. 30 Accounts Receivable ..............................................................................................


1100 18,000
Service Revenue .......................................................................................
5000 18,000 t

31 Salaries Expense ....................................................................................................


7100 7,500
Cash ...............................................................................................................
1000 7,500

31 Interest Expense .....................................................................................................


7200 300
Bank Loan Payable .................................................................................................
3100 700
Cash ...............................................................................................................
1000 1,000

31 Income Tax Expense ..............................................................................................


9000 1,200
Cash ...............................................................................................................
1000 1,200

(b)
Cash #1000
Jan. 2 15,000 Jan. 4 3,000
3 50,000 5 20,000
24 10,000 10 500
13 3,000
15 7,500
20 1,000
30 6,000
31 7,500
31 1,000
31 1,200
Jan. 31 Bal. 24,300

Accounts Receivable #1100


Jan. 17 15,000 Jan. 24 10,000
30 18,000
Jan. 31 Bal. 23,000

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COMPREHENSIVE CASE: CHAPTERS 1 – 3 (Continued)


(b) (Continued)

Supplies #1200
Jan. 11 1,000
Jan. 31 Bal. 1,000

Prepaid Insurance #1300


Jan. 30 6,000
Jan. 31 Bal. 6,000

Equipment #2000
Jan. 5 40,000
Jan. 31 Bal. 40,000

Accounts Payable #3000


Jan. 5 20,000
11 1,000
Jan. 31 Bal. 21,000

Bank Loan Payable #3100


Jan. 31 700 Jan. 3 50,000
Jan. 31 Bal. 49,300

Common Shares #4000


Jan. 2 15,000
Jan. 31 Bal. 15,000

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COMPREHENSIVE CASE: CHAPTERS 1 – 3 (Continued)


(b) (Continued)

Service Revenue #5000


Jan. 17 15,000
30 18,000
Jan. 31 Bal. 33,000

Advertising Expense #7000


Jan. 10 500
13 3,000
Jan. 31 Bal. 3,500

Salaries Expense #7100


Jan. 15 7,500
31 7,500
Jan. 31 Bal. 15,000

Interest Expense #7200


Jan. 31 300
Jan. 31 Bal. 300

Office Expense #7300


Jan. 20 1,000
Jan. 31 Bal. 1,000

Rent Expense #7400


Jan. 4 3,000
Jan. 31 Bal. 3,000

Income Tax Expense #9000


Jan. 31 1,200
Jan. 31 Bal. 1,200

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COMPREHENSIVE CASE: CHAPTERS 1 – 3 (Continued)

(c)
SOFTWARE ADVISORS LIMITED
Trial Balance
January 31, 2015
Debit Credit
1000 Cash $ 24,300
1100 Accounts receivable 23,000
1200 Supplies 1,000
1300 Prepaid insurance 6,000
2000 Equipment 40,000
3000 Accounts payable $ 21,000
3100 Bank loan payable 49,300
4000 Common shares 15,000
5000 Service revenue 33,000
7000 Advertising expense 3,500
7100 Salaries expense 15,000
7200 Interest expense 300
7300 Office expense 1,000
7400 Rent expense 3,000
9000 Income tax expense 1,200 0
$118,300 $118,300

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COMPREHENSIVE CASE: CHAPTERS 1 – 3 (Continued)

(d)

(1)
SOFTWARE ADVISORS LIMITED
Income Statement
Month Ended January 31, 2015

Revenues
Service revenue $33,000
Expenses
Salaries expense $15,000
Advertising expense 3,500
Rent expense 3,000
Office expense 1,000
Interest expense 300
Total expenses 22,800
Profit before income tax 10,200
Income tax expense 1,200
Profit $ 9,000

(2)

SOFTWARE ADVISORS LIMITED


Statement of Changes in Equity
Month Ended January 31, 2015

Common Retained Total


Shares Earnings Equity

Balance, January 1 $ 0 $ 0 $ 0
Issued common shares 15,000 15,000
Profit 0 9,000 9,000
Balance, January 31 $15,000 $9,000 $24,000

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COMPREHENSIVE CASE: CHAPTERS 1 – 3 (Continued)

(d) (Continued)

(3)
SOFTWARE ADVISORS LIMITED
Statement of Financial Position
January 31, 2015

Assets

Current assets
Cash $24,300
Accounts receivable 23,000
Supplies 1,000
Prepaid insurance 6,000 $54,300
Property, plant, and equipment
Equipment 40,000
Total assets $94,300

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $21,000
Non-current liabilities
Bank loan payable 49,300
Total liabilities 70,300
Shareholders’ equity
Common shares $15,000
Retained earnings 9,000 24,000
Total liabilities and shareholders’ equity $94,300

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without the prior written permission of John Wiley & Sons Canada, Ltd.
(MMXV v F4)

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