2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in

©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Solutions Manual, Chapter 2 57 Chapter 2

Analyzing and Recording Transactions

QUESTIONS

• Common asset accounts: cash, accounts receivable, notes receivable, prepaid

expenses (rent, insurance, etc.), office supplies, store supplies, equipment, building, and land.

b. Common liability accounts: accounts payable, notes payable, and unearned

revenue, wages payable, and taxes payable.

c. Common equity accounts: owner, capital and owner, withdrawals.

• A note payable is formal promise, usually denoted by signing a promissory note to

pay a future amount. A note payable can be short-term or long-term, depending on when it is due. An account payable also references an amount owed to an entity. An account payable can be oral or implied, and often arises from the purchase of inventory, supplies, or services. An account payable is usually short-term.

• There are several steps in processing transactions: (1) Identify and analyze the

transaction or event, including the source document(s), (2) apply double-entry accounting, (3) record the transaction or event in a journal, and (4) post the journal entry to the ledger. These steps would be followed by preparation of a trial balance and then with the reporting of financial statements.

• A general journal can be used to record any business transaction or event.
• Debited accounts are commonly recorded first. The credited accounts are commonly

indented.

• A transaction is first recorded in a journal to create a complete record of the

transaction in one place. (The journal is often referred to as the book of original entry.) This process reduces the likelihood of errors in ledger accounts.

• Expense accounts have debit balances because they are decreases to equity (and

equity has a credit balance).

• The recordkeeper prepares a trial balance to summarize the contents of the ledger

and to verify the equality of total debits and total credits. The trial balance also serves as a helpful internal document for preparing financial statements and other reports.Fundamental Accounting Principles 21st Edition Wild Solutions Manual Visit TestBankDeal.com to get complete for all chapters

©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Fundamental Accounting Principles, 21st Edition 58

• The error should be corrected with a separate (subsequent) correcting entry. The

entry’s explanation should describe why the correction is necessary.

• The four financial statements are: income statement, balance sheet, statement of

owner’s equity, and statement of cash flows.

• The balance sheet provides information that helps users understand a company’s

financial position at a point in time. Accordingly, it is often called the statement of financial position. The balance sheet lists the types and dollar amounts of assets, liabilities, and equity of the business.

• The income statement lists the types and amounts of revenues and expenses, and

reports whether the business earned a net income (also called profit or earnings) or a net loss.

• An income statement user must know what time period is covered to judge whether

the company’s performance is satisfactory. For example, a statement user would not be able to assess whether the amounts of revenue and net income are satisfactory without knowing whether they were earned over a week, a month, a quarter, or a year.

• (a) Assets are probable future economic benefits obtained or controlled by a specific

entity as a result of past transactions or events. (b) Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (c) Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. (d) Net assets refer to equity.

• The balance sheet is sometimes referred to as the statement of financial position.

16. Debit balance accounts on the Polaris balance sheet include: Cash and cash

equivalents; Trade receivables, net; Inventories, net; Prepaid expenses and other; Income taxes receivable; Deferred tax assets; Land, buildings and improvements; Equipment and tooling; Property and equipment, net; Investments in finance affiliate; Investments in other affiliates; Goodwill and other intangible assets, net.

Credit balance accounts on the Polaris balance sheet include: Accumulated

depreciation; Current portion of long-term borrowings under credit agreement; Current portion of capital lease obligations; Accounts payable; Accrued expenses (including compensation, warranties, sales promotions and incentives, dealer holdback and other); Income taxes payable; Deferred income taxes; Capital lease obligations; Long-term debt; Preferred stock; Common stock; Additional paid-in capital; Retained earnings; Accumulated other comprehensive income, net.

• The asset account with receivable in its account title is: Accounts receivable, less

allowances. The liabilities with payable in the account title are: Accounts payable and Income taxes payable.

• KTM’s revenue account is titled “Net sales.”
• Piaggio calls the asset referring to its merchandise available for sale: “Inventories.”

©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Solutions Manual, Chapter 2 59

QUICK STUDIES

Quick Study 2-1 (10 minutes)

The likely source documents include:

• Sales ticket
• Telephone bill
• Invoice from supplier
• Bank statement

Quick Study 2-2 (5 minutes)

• B Balance sheet
• E Statement of owner’s equity
• I Income statement
• B Balance sheet
• B Balance sheet
• I Income statement
• B Balance sheet
• B Balance sheet
• B Balance sheet

Quick Study 2-3 (10 minutes)

• Debit d. Debit g. Credit
• Debit e. Debit h. Debit
• Credit f. Debit i. Credit

Quick Study 2-4 (10 minutes)

• Debit e. Debit i. Credit
• Debit f. Credit j. Debit
• Credit g. Credit k. Debit
• Credit h. Debit l. Credit

©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Fundamental Accounting Principles, 21st Edition 60 Quick Study 2-5 (10 minutes)

• Debit e. Debit i. Credit
• Credit f. Credit j. Debit
• Debit g. Credit
• Credit h. Credit

Quick Study 2-6 (15 minutes)

May 15 Cash .......................................................................... 70,000 Equipment ............................................................... 30,000

• Tyler, Capital ............................................... 100,000

Owner invests cash and equipment.

21 Office Supplies ........................................................ 280 Accounts Payable ........................................... 280 Purchased office supplies on credit.

25 Cash .......................................................................... 7,800 Landscaping Services Revenue .................... 7,800 Received cash for landscaping services.

30 Cash .......................................................................... 1,000 Unearned Landscaping Services Revenue .. 1,000 Received cash in advance for landscaping services.

Quick Study 2-7 (10 minutes)

The correct answer is a.

Explanation: If a $2,250 debit to Utilities Expense is incorrectly posted as a

credit, the effect is to understate the Utilities Expense debit balance by $4,500. This causes the Debit column total on the trial balance to be $4,500 less than the Credit column total.