Concept explainers
1.
To prepare: The
1.
Explanation of Solution
Journal:
Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.
The accounting equation implies the relationship between the assets, liabilities, and the stockholders equity. The balance of both the assets and the liabilities, stockholders equity must be equally balanced. The accounting equation is as follows;
- 1. Journalize the issuance of common stock.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 1 | Cash (A+) | 16,000 | |
Common stock (SE+) | 16,000 | ||
(To record the issuance of common stock to investors) |
Table (1)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $16,000.
- Common stock is a component of
stockholder equity account. Thus, an increase in common stock increases the stockholders equity account. Hence, common stock account is being credited to increase its balance by $16,000.
- 2. Journalize the payment of rent in advance.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 2 | Prepaid rent (A+) | 2,400 | |
Cash (A–) | 2,400 | ||
(To record the payment of rent in advance) |
Table (2)
- Prepaid rent is an asset account. Thus, an increase in prepaid rent increases the asset account. Hence, debit prepaid rent account by $2,400.
- Cash is an asset account. Thus, a decrease in cash decreases the asset account. Hence, credit cash account by $2,400.
- 3. Journalize the purchase of supplies.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 3 | Supplies (A+) | 300 | |
Cash (A–) | 300 | ||
(To record the purchase of supplies) |
Table (3)
- A supply is an asset account. Thus, an increase in supplies increases the asset account. Hence, debit supplies account by $300.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $300.
- 4. Journalize the amount deposited in bank by signing a note.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 4 | Cash (A+) | 10,000 | |
Notes payable (L+) | 10,000 | ||
(To record the amount received by signing a note) |
Table (4)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $10,000.
- Notes payable is a liability account. Thus, an increase in notes payable increases the liability account. Hence, notes payable account is being credited to increase its balance by $10,000.
- 5. Journalize the purchase of equipment and land.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 5 | Equipment (A+) | 2,500 | |
Land (A+) | 7,500 | ||
Cash (A–) | 10,000 | ||
(To record the purchase of equipment and the purchase of land) |
Table (5)
- Equipment is an asset account. Thus, an increase in equipment increases the asset account. Hence, debit equipment account by $2,500.
- Land is an asset account. Thus, an increase in land increases the asset account. Hence, debit land account by $7,500.
- Accounts payable is a liability account. Thus, an increase in accounts payable increases the liability account. Hence, account payable account is being credited to increase its balance by $10,000.
- 6. Journalize the advertisement expenses.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 6 | Advertisement expenses (E+, SE-) | 425 | |
Cash (A-) | 425 | ||
(To record the advertisement expenses ) |
Table (6)
- Advertisement expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in advertisement expense account decreases the stockholder’s equity account. Hence, advertisement expenses account is being debited to increase its balance by $425.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $425.
- 7. Journalize the sales made partly for cash and partly on account.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 7 | Cash (A+) | 1,525 | |
Accounts receivable (A+) | 275 | ||
Service revenue (R+, SE+) | 1,800 | ||
(To record the sales made partly for cash and partly on account) |
Table (7)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $1,525.
- Accounts receivable is an asset account. Thus, an increase in accounts receivable increases the asset account. Hence, debit accounts receivable account by $275.
- Sales revenue is a stockholder’s equity account. Thus, an increase in service revenue increases the stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $1,800.
- 8. Journalize the amount received from customer.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 8 | Cash (A+) | 50 | |
Accounts receivable (A–) | 50 | ||
(To record the cash receipt for the service performed on account) |
Table (8)
- Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $50.
- Accounts receivable is an asset account. Thus, a decrease in accounts receivable decreases the asset account. Hence, credit accounts receivable account by $50.
- 9. Journalize the payment made for repair.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 9 | Repairs and maintenance expense (E+, SE–) | 120 | |
Cash (A-) | 120 | ||
(To record the payment made for the repair charges) |
Table (9)
- Repairs and maintenance expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in repairs and maintenance expense account decreases the stockholder’s equity account. Hence, Repairs and maintenance expense account is being debited to increase its balance by $120.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $120.
- 10. Journalize the payment made for the wages.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
February, 28 | Wages expense (E+, SE–) | 420 | |
Cash (A–) | 420 | ||
(To record the payment made for the employee wages) |
Table (10)
- Wages expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in wages expense account decreases the stockholder’s equity account. Hence, wages expense account is being debited to increase its balance by $420.
- Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $420.
2.
To show: The unadjusted ending balances in T-accounts.
2.
Explanation of Solution
T-account:
An account is referred to as a T-account, because the alignment of the components of the account resembles the capital letter ‘T’. An account consists of the three main components which are as follows:
- The title of the account
- The left or debit side
- The right or credit side
The posting of the journal entries to the T accounts are as follows:
Cash (A) | |||||||
Beginning Balance | $0 | 2. | $2400 | ||||
1. | $ 16,000 | 3. | $300 | ||||
4. | $10,000 | 5. | $10,000 | ||||
7. | $1,525 | 6. | $425 | ||||
8. | $50 | 9. | $120 | ||||
10. | $420 | ||||||
Total | $ 27,575 | Total | $13,665 | ||||
Ending Balance | $13,910 | ||||||
Supplies (A) |
|||||||
Beginning Balance | $0 | ||||||
3. | 300 | ||||||
Ending Balance | $300 |
Accounts Receivable (A) | |||
Beginning Balance | $0 | ||
7. | 275 | 8. | $50 |
Ending Balance | $225 | ||
Prepaid Rent(A) |
|||
Beginning Balance | $0 | ||
2. | $2,400 | ||
Ending Balance | $2,400 | ||
Land (A) | |||
Beginning Balance | $0 | ||
5. | $7,500 | ||
Ending Balance | $7,500 |
Equipment (A) | |||
Beginning Balance | $0 | ||
5. | $2,500 | ||
Ending Balance | $2,500 |
Advertising expense (E) | |||
Beginning Balance | $0 | ||
6. | $425 | ||
Ending Balance | $425 |
Wages expense(E) | |||
Beginning Balance | $0 | ||
10. | $420 | ||
Ending Balance | $420 | ||
Repairs expense (E) | |||
Beginning Balance | $0 | ||
9. | $120 | ||
Ending Balance | $120 |
Notes Payable (L) | |||
Beginning Balance | $0 | ||
4. | $10,000 | ||
Ending Balance | $10,000 | ||
Common Stock (SE) | |||
Beginning Balance | $0 | ||
16. | $16,000 | ||
Ending Balance | $16,000 |
Sales Revenue (R) | |||
Beginning Balance | $ | ||
7. | $1,800 | ||
Ending Balance | $425 |
3.
To prepare: The unadjusted
3.
Explanation of Solution
Unadjusted trial balance:
Unadjusted trial balance is that statement which contains complete list of accounts with their unadjusted balances. This statement is prepared at the end of every financial period.
The unadjusted Trial balance of Company B at the end of February is prepared as follows:
Company B | ||
Unadjusted Trial Balance | ||
At February 28 | ||
Particulars | Debit | Credit |
Cash | $ 13,910 | |
Accounts Receivable | 225 | |
Supplies | 300 | |
Prepaid Rent | 2,400 | |
Land | 7,500 | |
Equipment | 2,500 | |
Notes Payable | 10,000 | |
Common Stock | 16,000 | |
Sales Revenue | 1,800 | |
Advertising Expense | 425 | |
Salaries and Wages Expense | 420 | |
Repairs and Maintenance Expense | 120 | |
Total | $ 27,800 | $ 27,800 |
Table (11)
The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $27,800.
4.
To calculate: The preliminary net income and net profit margin and determine whether the net profit is better or worse than the competitor.
4.
Explanation of Solution
Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.
The preliminary net income of the company is determined as follows:
Particulars | Amount ($) | Amount ($) |
Revenues: | ||
Sales Revenue | $1,800 | |
Total Revenues | 1,800 | |
Less: Expenses: | ||
Repair Expense | 120 | |
Wages Expense | 420 | |
Advertising Expense | 425 | |
Total Expenses | 965 | |
Net Income | $835 |
Table (8)
The net profit margin of the Company is determined as follows:
Company B is performing better than its competitor with a net profit margin of 46.4%.
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Chapter 3 Solutions
Fundamentals Of Financial Accounting
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