The Accounting Information System

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Chapter 3 The Accounting Information System 

QUESTIONS
1. Give an example of a transaction that results in:
(a) A decrease in an asset and a decrease in a liability.
(b) A decrease in one asset and an increase in another asset.
(c) A decrease in one liability and an increase in another liability.
2. Do the following events represent business transactions?
Explain your answer in each case.
(a) A computer is purchased on account.
(b) A customer returns merchandise and is given credit on account.
(c) A prospective employee is interviewed.
(d) The owner of the business withdraws cash from the business for personal use.
(e) Merchandise is ordered for delivery next month.
3. Name the accounts debited and credited for each of the following transactions.
(a) Billing a customer for work done.
(b) Receipt of cash from customer on account.
(c) Purchase of office supplies on account.
(d) Purchase of 15 gallons of gasoline for the delivery truck.
4. Why are revenue and expense accounts called temporary or nominal accounts?
5. Andrea Pafko, a fellow student, contends that the double entry system means that each transaction must be recorded twice. Is Andrea correct? Explain.

6. Is it necessary that a trial balance be taken periodically?
What purpose does it serve?
7. Indicate whether each of the following items is a real or nominal account and whether it appears in the balance sheet or the income statement.
(a) Prepaid Rent.
(b) Salaries and Wages Payable.
(c) Inventory.
(d) Accumulated Depreciation—Equipment.
(e) Equipment.
(f) Service Revenue.
(g) Salaries and Wages Expense.
(h) Supplies.
8. Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain.

9. (a) How are the components of revenues and expenses different for a merchandising company? (b) Explain the income measurement process of a merchandising company.
10. What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts?
(a) Accounts Payable.
(b) Expense accounts.
(c) Revenue accounts.
(d) Retained Earnings account.
(e) Cash.
11. What are adjusting entries and why are they necessary?
12. What are closing entries and why are they necessary?
13. Jay Hawk, maintenance supervisor for Boston Insurance
Co., has purchased a riding lawnmower and accessories to be used in maintaining the grounds around corporate headquarters. He has sent the following information to the accounting department.
Cost of mower and Date purchased 7/1/14 accessories $4,000 Monthly salary of Estimated useful life 5 yrs groundskeeper $1,100 Salvage value $0 Estimated annual fuel cost $150
Compute the amount of depreciation expense (related to the mower and accessories) that should be reported on Boston’s December 31, 2014, income statement. Assume straight-line depreciation.
14. Midwest Enterprises made the following entry on
December 31, 2014.
Interest Expense 10,000
Interest Payable 10,000
(To record interest expense due on loan from Anaheim
National Bank)
What entry would Anaheim National Bank make regarding its outstanding loan to Midwest Enterprises? Explain why this must be the case.
*15. Distinguish between cash-basis accounting and accrual basis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?
*16. When salaries and wages expense for the year is computed, why are beginning accrued salaries and wages subtracted from, and ending accrued salaries and wages added to, salaries and wages paid during the year?
*17. List two types of transactions that would receive different accounting treatment using (a) strict cash-basis accounting, and (b) a modified cash basis.
*18. What are reversing entries, and why are they used?
*19. “A worksheet is a permanent accounting record, and its use is required in the accounting cycle.” Do you agree? Explain.

BRIEF EXERCIS
BE3-1 Transactions for Mehta Company for the month of May are presented below. Prepare journal entries for each of these transactions. (You may omit explanations.)
M
ay 1 B.D. Mehta invests $4,000 cash in exchange for common stock in a small welding corporation.
3 Buys equipment on account for $1,100.
13 Pays $400 to landlord for May rent.
21 Bills Noble Corp. $500 for welding work done.
B
E3-2 Agazzi Repair Shop had the following transactions during the first month of business as a proprietorship.
Journalize the transactions. (Omit explanations.)
A
ug. 2 Invested $12,000 cash and $2,500 of equipment in the business.
7 Purchased supplies on account for $500. (Debit asset account.)
12 Performed services for clients, for which $1,300 was collected in cash and $670 was billed to the clients.
15 Paid August rent $600.
19 Counted supplies and determined that only $270 of the supplies purchased on August 7 are still on hand.
B
E3-3 On July 1, 2014, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co., journalize the entry on July 1 and the adjusting entry on December 31.
B
E3-4 Using the data in BE3-3, journalize the entry on July 1 and the adjusting entry on December 31 for
Zubin Insurance Co. Zubin uses the accounts Unearned Service Revenue and Service Revenue.
B
E3-5 Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years’ insurance coverage. Prepare P&G’s February 1 journal entry and the annual adjusting entry on June 30.
B
E3-6 LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee
(tenant) for 3 months for a total cash payment of $2,400 received in advance. Prepare LaBouche’s November
1 journal entry and the December 31 annual adjusting entry.
B
E3-7 Dresser Company’s weekly payroll, paid on Fridays, totals $8,000. Employees work a 5-day week.
Prepare Dresser’s adjusting entry on Wednesday, December 31, and the journal entry to record the $8,000 cash payment on Friday, January 2.
B
E3-8 Included in Gonzalez Company’s December 31 trial balance is a note receivable of $12,000. The note is a 4-month, 10% note dated October 1. Prepare Gonzalez’s December 31 adjusting entry to record $300 of accrued interest, and the February 1 journal entry to record receipt of $12,400 from the borrower.
BE3-9 Prepare the following adjusting entries at August 31 for Walgreens.
(
a) Interest on notes payable of $300 is accrued.
(
b) Services performed but unbilled total $1,400.
(
c) Salaries and wages earned by employees of $700 have not been recorded.
(
d) Bad debt expense for year is $900.
Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable,
Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt
Expense.
B
E3-10 At the end of its first year of operations, the trial balance of Alonzo Company shows Equipment $30,000 and zero balances in Accumulated Depreciation—Equipment and Depreciation Expense. Depreciation for the year is estimated to be $2,000. Prepare the adjusting entry for depreciation at December 31, and indicate the balance sheet presentation for the equipment at December 31.
B
E3-11 Side Kicks has year-end account balances of Sales Revenue $808,900; Interest Revenue $13,500;
Cost of Goods Sold $556,200; Administrative Expenses $189,000; Income Tax Expense $35,100; and Dividends $18,900. Prepare the year-end closing entries.
*BE3-12 Kelly Company had cash receipts from customers in 2014 of $142,000. Cash payments for operating expenses were $97,000. Kelly has determined that at January 1, accounts receivable was $13,000, and prepaid expenses were $17,500. At December 31, accounts receivable was $18,600, and prepaid expenses were $23,200. Compute (a) service revenue and (b) operating expenses. *BE3-13 Assume that Best Buy made a December 31 adjusting entry to debit Salaries and Wages Expense and credit Salaries and Wages Payable for $4,200 for one of its departments. On January 2, Best Buy paid the weekly payroll of $7,000. Prepare Best Buy’s (a) January 1 reversing entry; (b) January 2 entry (assuming the reversing entry was prepared); and (c) January 2 entry (assuming the reversing entry was not prepared).
 
EXERCISES


E3-
1 (Transaction Analysis—Service Company) Beverly Crusher is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred.
A
pril 2 Invested $32,000 cash and equipment valued at $14,000 in the business.
2 Hired a secretary-receptionist at a salary of $290 per week payable monthly.
3 Purchased supplies on account $700. (Debit an asset account.)
7 Paid offi ce rent of $600 for the month.
11 Completed a tax assignment and billed client $1,100 for services rendered. (Use Service Revenue account.)
12 Received $3,200 advance on a management consulting engagement.
17 Received cash of $2,300 for services completed for Ferengi Co.
21 Paid insurance expense $110.
30 Paid secretary-receptionist $1,160 for the month.
30 A count of supplies indicated that $120 of supplies had been used.
30 Purchased a new computer for $6,100 with personal funds. (The computer will be used exclusively for business purposes.)
I
nstructions
J
ournalize the transactions in the general journal. (Omit explanations.)

E3-
2 (Corrected Trial Balance) The trial balance of Wanda Landowska Company (shown on the next page) does not balance. Your review of the ledger reveals the following. (a) Each account had a normal balance. (b) The debit footings in Prepaid Insurance, Accounts Payable, and Property Tax Expense were each understated $100. (c) A transposition error was made in Accounts Receivable and Service Revenue; the correct balances for Accounts Receivable and Service Revenue are $2,750 and $6,690, respectively. (d) A debit posting to Advertising Expense of $300 was omitted. (e) A $1,500 cash drawing by the owner was debited to Owner’s Capital and credited to Cash.
Instructions
P
repare a correct trial balance.
4
E3-3 (Corrected Trial Balance) The trial balance of Blues Traveler Corporation does not balance.
An examination of the ledger shows these errors.
1
. Cash received from a customer on account was recorded (both debit and credit) as $1,380 instead of $1,830.
2
. The purchase on account of a computer costing $3,200 was recorded as a debit to Office Expense and a credit to Accounts Payable.
3
. Services were performed on account for a client, $2,250, for which Accounts Receivable was debited $2,250 and Service Revenue was credited $225.
4
. A payment of $95 for telephone charges was entered as a debit to Office Expense and a debit to Cash.
5
. The Service Revenue account was totaled at $5,200 instead of $5,280.
I
nstructions
F
rom this information prepare a corrected trial balance.

E3-
4 (Corrected Trial Balance) The trial balance of Watteau Co. (shown on the next page) does not balance.Each of the listed accounts should have a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.
1
. Cash received from a customer on account was debited for $570, and Accounts Receivable was credited for the same amount. The actual collection was for $750.
2
. The purchase of a computer printer on account for $500 was recorded as a debit to Supplies for $500 and a credit to Accounts Payable for $500.
3
. Services were performed on account for a client for $890. Accounts Receivable was debited for $890 and Service Revenue was credited for $89.
4
. A payment of $65 for telephone charges was recorded as a debit to Office Expense for $65 and a debit to Cash for $65.
5
. When the Unearned Service Revenue account was reviewed, it was found that service revenue amounting to $325 was performed prior to June 30 (related to Unearned Service Revenue).
6
. A debit posting to Salaries and Wages Expense of $670 was omitted.
7
. A payment on account for $206 was credited to Cash for $206 and credited to Accounts Payable for $260.
8
. A dividend of $575 was debited to Salaries and Wages Expense for $575 and credited to Cash for $575.
I
nstructions
P
repare a correct trial balance. (Note: It may be necessary to add one or more accounts to the trial balance.)

E3-
5 (Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.
A
n analysis of the accounts shows the following.
1
. The equipment depreciates $250 per month.
2
. One-third of the unearned rent was recognized as revenue during the quarter.
3
. Interest of $500 is accrued on the notes payable.
4
. Supplies on hand total $850.
5
. Insurance expires at the rate of $300 per month.Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $ 8,400
Notes Payable 20,000
Unearned Rent Revenue 9,300
Rent Revenue 60,000
Interest Expense –0–
Salaries and Wages Expense 14,000
Instructions
P
repare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. (Omit explanations.)

E3-
6 (Adjusting Entries) Karen Weller, D.D.S., opened a dental practice on January 1, 2014. During the first month of operations, the following transactions occurred.
1
. Performed services for patients who had dental plan insurance. At January 31, $750 of such services was performed but not yet billed to the insurance companies.
2
. Utility expenses incurred but not paid prior to January 31 totaled $520.
3
. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000,
3-year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
4
. Purchased a one-year malpractice insurance policy on January 1 for $12,000.
5
. Purchased $1,600 of dental supplies. On January 31, determined that $500 of supplies were on hand.
I
nstructions
P
repare the adjusting entries on January 31. (Omit explanations.) Account titles are Accumulated
Depreciation—Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance
Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities
Expense, and Accounts Payable.

E3-
7 (Analyze Adjusted Data) A partial adjusted trial balance of Piper Company at January 31, 2014, shows the following.
Instructions
A
nswer the following questions, assuming the year begins January 1.
(
a) If the amount in Supplies Expense is the January 31 adjusting entry, and $850 of supplies was purchased in January, what was the balance in Supplies on January 1?
(
b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for one year, what was the total premium and when was the policy purchased?
(
c) If $2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at
December 31, 2013?
(
d) If $1,600 was received in January for services performed in January, what was the balance in
Unearned Service Revenue at December 31, 2013?

E3-
8 (Adjusting Entries) Andy Roddick is the new owner of Ace Computer Services. At the end of
August 2014, his first month of ownership, Roddick is trying to prepare monthly financial statements.
Below is some information related to unrecorded expenses that the business incurred during August.
1
. At August 31, Roddick owed his employees $1,900 in wages that will be paid on September 1.
2
. At the end of the month, he had not yet received the month’s utility bill. Based on past experience, he estimated the bill would be approximately $600.
3
. On August 1, Roddick borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 8%.
4
. A telephone bill in the amount of $117 covering August charges is unpaid at August 31.
I
nstructions
P
repare the adjusting journal entries as of August 31, 2014, suggested by the information above.

E3-9 (Adjusting Entries)
Selected accounts of Urdu Company are shown below.
I
nstructions
F
rom an analysis of the T-accounts, reconstruct (a) the October transaction entries, and (b) the adjusting journal entries that were made on October 31, 2014. Prepare explanations for each journal entry.

E3-
10 (Adjusting Entries) Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.GRECO RESORT
TRIAL BALANCE
AUGUST 31, 2014
D
ebit Credit
Cash $ 19,600
Prepaid Insurance 4,500
Supplies 2,600
Land 20,000
Buildings 120,000
Equipment 16,000
Accounts Payable $ 4,500
Unearned Rent Revenue 4,600
Mortgage Payable 60,000
Common Stock 91,000
Retained Earnings 9,000
Dividends 5,000
Rent Revenue 76,200
Salaries and Wages Expense 44,800
Utilities Expenses 9,200
Maintenance and Repairs Expense 3,600 $245,300 $245,300
Instructions
(
a)
Journalize the adjusting entries on August 31 for the 3-month period June 1–August 31. (Omit explanations.)
(
b) Prepare an adjusted trial balance on August 31.

E3-
11 (Prepare Financial Statements) The adjusted trial balance of Anderson Cooper Co. as of December
31, 2014, contains the following.
ANDERSON COOPER CO.
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2014
A
ccount Titles Dr. Cr.
Cash $19,472
Accounts Receivable 6,920
Prepaid Rent 2,280
Equipment 18,050
Accumulated Depreciation—Equipment $ 4,895
Notes Payable 5,700
Accounts Payable 5,472
Common Stock 20,000
Retained Earnings 11,310
Dividends 3,000
Service Revenue 11,590
Salaries and Wages Expense 6,840
Rent Expense 2,260
Depreciation Expense 145
Interest Expense 83
Interest Payable 83 $59,050 $59,050

I
nstructions
(
a)
Prepare an income statement.
(
b) Prepare a statement of retained earnings.
(
c) Prepare a classified balance sheet.

E3-
12 (Prepare Financial Statements) Santo Design Agency was founded by Thomas Grant in January
2008. Presented below is the adjusted trial balance as of December 31, 2014.


S
ANTO DESIGN AGENCY
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2014
D
r. Cr.
Cash $ 11,000
Accounts Receivable 21,500
Supplies 5,000
Prepaid Insurance 2,500
Equipment 60,000
Accumulated Depreciation—Equipment $ 35,000
Accounts Payable 5,000
Interest Payable 150
Notes Payable 5,000
Unearned Service Revenue 5,600
Salaries and Wages Payable 1,300
Common Stock 10,000
Retained Earnings 3,500
Service Revenue 61,500
Salaries and Wages Expense 11,300
Insurance Expense 850
Interest Expense 500
Depreciation Expense 7,000
Supplies Expense 3,400
Rent Expense 4,000 $127,050 $127,050
Instructions
(
a)
Prepare an income statement and a statement of retained earnings for the year ending December 31,
2014, and an unclassified balance sheet at December 31.
(
b) Answer the following questions.
(
1) If the note has been outstanding 6 months, what is the annual interest rate on that note?
(
2) If the company paid $17,500 in salaries in 2014, what was the balance in Salaries and Wages
Payable on December 31, 2013?

E3-
13 (Closing Entries) The adjusted trial balance of Lopez Company shows the following data pertaining to sales at the end of its fiscal year, October 31, 2014: Sales Revenue $800,000, Delivery Expense $12,000,
Sales Returns and Allowances $24,000, and Sales Discounts $15,000.
I
nstructions
(
a)
Prepare the revenues section of the income statement.
(
b) Prepare separate closing entries for (1) sales and (2) the contra accounts to sales.

E3-
14 (Closing Entries) Presented below is information related to Gonzales Corporation for the month of
January 2014.
C
ost of goods sold $208,000 Salaries and wages expense $ 61,000
Delivery expense 7,000 Sales discounts 8,000
Insurance expense 12,000 Sales returns and allowances 13,000
Rent expense 20,000 Sales revenue 350,000
I
nstructions
P
repare the necessary closing entries.
8
E3-15 (Missing Amounts) Presented below is financial information for two different companies.
I
nstructions
C
ompute the missing amounts.

E3-
16 (Closing Entries for a Corporation) Presented below are selected account balances for Homer
Winslow Co. as of December 31, 2014.
7

I
nventory 12/31/14 $ 60,000 Cost of Goods Sold $225,700
Common Stock 75,000 Selling Expenses 16,000
Retained Earnings 45,000 Administrative Expenses 38,000
Dividends 18,000 Income Tax Expense 30,000
Sales Returns and Allowances 12,000
Sales Discounts 15,000
Sales Revenue 410,000
I
nstructions
P
repare closing entries for Homer Winslow Co. on December 31, 2014. (Omit explanations.)

E3-
17 (Transactions of a Corporation, Including Investment and Dividend) Scratch Miniature Golf and
Driving Range Inc. was opened on March 1 by Scott Verplank. The following selected events and transactions occurred during March.
M
ar. 1 Invested $50,000 cash in the business in exchange for common stock.
3 Purchased Michelle Wie’s Golf Land for $38,000 cash. The price consists of land $10,000, building $22,000, and equipment $6,000. (Make one compound entry.)
5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,600.
6 Paid cash $1,480 for a one-year insurance policy.
10 Purchased golf equipment for $2,500 from Singh Company, payable in 30 days.
Alatorre Company Eduardo Company
Sales revenue $90,000 (d)
Sales returns and allowances (a) $ 5,000
Net sales 81,000 95,000
Cost of goods sold 56,000 (e)
Gross profi t (b) 38,000
Operating expenses 15,000 23,000
Net income (c) 15,000
Mar. 18 Received golf fees of $1,200 in cash.
25 Declared and paid a $500 cash dividend.
30 Paid wages of $900.
30 Paid Singh Company in full.
31 Received $750 of fees in cash.
S
cratch uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable,
Common Stock, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
I
nstructions
J
ournalize the March transactions. (Provide explanations for the journal entries.) 

* E3-18 (Cash to Accrual Basis) Jill Accardo, M.D., maintains the accounting records of Accardo Clinic on a cash basis. During 2014, Dr. Accardo collected $142,600 from her patients and paid $55,470 in expenses. At
January 1, 2014, and December 31, 2014, she had accounts receivable, unearned service revenue, accrued expenses, and prepaid expenses as follows. (All long-lived assets are rented.)
Instructions
P
repare a schedule that converts Dr. Accardo’s “excess of cash collected over cash disbursed” for the year 2014 to net income on an accrual basis for the year 2014. 
* E3-19 (Cash and Accrual Basis) Wayne Rogers Corp. maintains its financial records on the cash basis of accounting. Interested in securing a long-term loan from its regular bank, Wayne Rogers Corp. requests you as its independent CPA to convert its cash-basis income statement data to the accrual basis. You are provided with the following summarized data covering 2013, 2014, and 2015.
Instructions
(
a)
Using the data above, prepare abbreviated income statements for the years 2013 and 2014 on the cash basis.
(
b) Using the data above, prepare abbreviated income statements for the years 2013 and 2014 on the accrual basis. 
* E3-20 (Adjusting and Reversing Entries) When the accounts of Daniel Barenboim Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period.
1
. The prepaid insurance account shows a debit of $5,280, representing the cost of a 2-year fire insurance policy dated August 1 of the current year.
2
. On November 1, Rent Revenue was credited for $1,800, representing revenue from a subrental for a
3-month period beginning on that date.
3
. Purchase of advertising materials for $800 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of $290 are on hand.
4
. Interest of $770 has accrued on notes payable.
I
nstructions
P
repare the following in general journal form.
(
a) The adjusting entry for each item.
(
b) The reversing entry for each item where appropriate.


*E3-21 (Worksheet) Presented below are selected accounts for Alvarez Company as reported in the worksheet at the end of May 2014.Instructions
C
omplete the worksheet by extending amounts reported in the adjusted trial balance to the appropriate columns in the worksheet. Do not total individual columns. 


* E3-22 (Worksheet and Balance Sheet Presentation) The adjusted trial balance for Ed Bradley Co. is presented in the following worksheet for the month ended April 30, 2014.Instructions
C
omplete the worksheet and prepare a classified balance sheet.
I
nsert Page Layout Formulas Data Review View


* E3-23 (Partial Worksheet Preparation) Jurassic Park Co. prepares monthly financial statements from a worksheet. Selected portions of the January worksheet showed the following data.During February, no events occurred that affected these accounts. But at the end of February, the following information was available.
(
a) Supplies on hand $715
(b) Monthly depreciation $257
(c) Accrued interest $ 50
I
nstructions
R
eproduce the data that would appear in the February worksheet, and indicate the amounts that would be shown in the January income statement. 

Click here to purchase the Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition