© the mcgraw-hill companies, inc., 2006 mcgraw-hill/irwin1 review exercise chapter 1-3

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin1

Review ExerciseChapter

1-31-3


Exercise 1: Business Entity (Chap 1) Exercise 1: Business Entity (Chap 1)Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.

Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither

Chen nor Fitch has personal responsibility for the debts of Financial Services.

Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally

liable for the debts of the business.

XLT Services does not have separate legal existence apart from the one person who

owns it.

BioProducts does not pay income taxes and has one owner.

Tampa Biz pays its own income taxes and has two owners.


Exercise 1: Business Entity (Chap 1)Exercise 1: Business Entity (Chap 1)Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.


Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither

Chen nor Fitch has personal responsibility for the debts of Financial Services.

Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally

liable for the debts of the business.

XLT Services does not have separate legal existence apart from the one person who

owns it.

BioProducts does not pay income taxes and has one owner.

Tampa Biz pays its own income taxes and has two owners.

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes


Exercise 1: Business Entity (Chap 1)Exercise 1: Business Entity (Chap 1)Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock. (Corporation)


(Sole proprietorship )

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor

Fitch has personal responsibility for the debts of Financial Services. (Corporation, Limited

Liability)

Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable

for the debts of the business. (Partnership, Unlimited Liability)

XLT Services does not have separate legal existence apart from the one person who owns

it. (Sole proprietorship, not a legal entity )

BioProducts does not pay income taxes and has one owner. (Sole proprietorship, Income

not taxed )

Tampa Biz pays its own income taxes and has two owners.(Corporation,Income taxed)


Exercise 2: Accounting Equation & F/S (Chap 2) Exercise 2: Accounting Equation & F/S (Chap 2)

What is the number for ‘?’

December 31. 2004: A B C D EAssets $45,000 $35,000 $29,000 $80,000 $123,000 Liabilities 23,500 22,500 14,000 38,000 ?

December 31 , 2005:Assets 48,000 41,000 ? 125,000 112,500Liabilities ? 27,500 19,000 64,000 75,000

During year 2005:Owner investments 5,000 1,500 7,750 ? 4,500Net income 7,500 ? 9,000 12,000 18,000Owner cash withdrawals 2,500 3,000 3,875 0 9,000


Exercise 2: Accounting Equation & F/S (Chap 2)Exercise 2: Accounting Equation & F/S (Chap 2)

December 31. 2004: A B C D E

Assets $45,000 $35,000 $29,000 $80,000 $123,000

Liabilities 23,500 22,500 14,000 38,000 ?Equity 21,500 12,500 15,000 42,000

December 31 , 2005:

Assets 48,000 41,000 ? 125,000 112,500

Liabilities ? 27,500 19,000 64,000 75,000Equity 13,500 61,000 37,500

During year 2005:

Equity 12/31/2004 21,500 12,500 15,000 42,000

Owner investments 5,000 1,500 7,750 ? 4,500

Net income 7,500 ? 9,000 12,000 18,000

Owner cash withdrawals 2,500 3,000 3,875 0 9,000Equity 12/31/2005 13,500 61,000 37,500

LiabilitiesLiabilities EquityEquityAssetsAssets = +



December 31. 2004: A B C D EAssets $45,000 $35,000 $29,000 $80,000 $123,000 Liabilities 23,500 22,500 14,000 38,000 ?Equity 21,500 12,500 15,000 42,000 24,000

December 31 , 2005:Assets 48,000 41,000 ? 125,000 112,500Liabilities ? 27,500 19,000 64,000 75,000Equity 31,500 13,500 27,875 61,000 37,500

During year 2005:Equity 12/31/2004 21,500 12,500 15,000 42,000 24,000Owner investments 5,000 1,500 7,750 7,000 4,500Net income 7,500 2,500 9,000 12,000 18,000Owner cash withdrawals 2,500 3000 3,875 0 9,000Equity 12/31/2005 31,500 13,500 27,875 61,000 37,500



December 31. 2004: A B C D EAssets $45,000 $35,000 $29,000 $80,000 $123,000 Liabilities 23,500 22,500 14,000 38,000 99,000Equity 21,500 12,500 15,000 42,000 24,000

December 31 , 2005:Assets 48,000 41,000 46,875 125,000 112,500Liabilities 16,500 27,500 19,000 64,000 75,000Equity 31,500 13,500 27,875 61,000 37,500

During year 2005:Equity 12/31/2004 21,500 12,500 15,000 42,000 24,000Owner investments 5,000 1,500 7,750 7,000 4,500Net income 7,500 2,500 9,000 12,000 18,000Owner cash withdrawals 2,500 3000 3,875 0 9,000Equity 12/31/2005 31,500 13,500 27,875 61,000 37,500


Exercise 3: Account Type (Chap 2)Exercise 3: Account Type (Chap 2)(1) Type of account as an asset, liability, equity, revenue, or expense?

(2) debit (Dr.) or credit (Cr.) when account increase?

(3) Normal balance of the account?Type Account increase Normal balance

Unearned Revenue

Accounts Payable

Postage Expense

Prepaid Insurance

Wages Expense

Land

Owner Capital

Accounts Receivable

Owner Withdrawals

Cash

Equipment

Fees Earned


LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

Notes Receivabl

e

Notes Receivabl

e

SuppliesSupplies

Prepaid AccountsPrepaid

Accounts

Accounts ReceivableAccounts

Receivable

AssetAccounts

AssetAccounts

Asset AccountsAsset Accounts


Asset accountAsset account

Cash: reflects a company’s cash balance. Account receivable: held by a seller and refer

to promises of payment from customers to sellers. (credit sales or sales on account)

Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note.

Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)


Asset accountAsset account

Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts.

Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).


Accrued LiabilitiesAccrued

LiabilitiesUnearned RevenuesUnearned Revenues

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

LiabilityAccountsLiability

Accounts

Liability AccountsLiability Accounts


Liability accountsLiability accounts

Accounts payable: oral or implied promises to pay later, commonly arise from purchases of merchandise.

Note payable: a formal promise, usually denoted by the signing of a promissory note, to pay a future amount.

Accrued liabilities: They are amounts owed that are not yet paid (ex. Wages payable, taxes payable).


Liability accountsLiability accounts

Unearned revenue: a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as unearned revenue (ex. Unearned ticket revenue).


EquityAccounts

EquityAccounts

RevenuesRevenues

Owner’s Capital

Owner’s Capital

Owner’s Withdrawals


ExpensesExpenses

Equity AccountsEquity Accounts


LiabilitiesLiabilities EquityEquityAssetsAssets = +

Equity AccountsEquity Accounts

Owner’s Capital

Owner’s Capital


Owner’s Withdrawals RevenuesRevenues ExpensesExpenses

+ +– –


Equity accountsEquity accounts

Revenues: gross increase in equity from a company’s earnings activities.

Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.

Owner investments: the amounts an owner puts into the company.

Owner withdrawals: the amounts take away from the company for personal use.


Exercise 3: Accounting Type (Chap 2)Exercise 3: Accounting Type (Chap 2)(1) Type of account as an asset, liability, equity, revenue, or expense,

(2) debit (Dr.) or credit (Cr.) when account increase

(3) Normal balance of the account.Type Account increase Normal balance

Unearned Revenue Liability Cr. Cr.

Accounts Payable Liability Cr. Cr.

Postage Expense Expense Dr. Dr.

Prepaid Insurance Asset Dr. Dr.

Wages Expense Expense Dr. Dr.

Land Asset Dr. Dr.

Owner Capital Equity Cr. Cr.

Accounts Receivable Asset Dr. Dr.

Owner Withdrawals Equity Dr. Dr.

Cash Asset Dr. Dr.

Equipment Asset Dr. Dr.

Fees Earned Revenue Cr. Cr.


Exercise 4: T-Account, Debit & Credit (Chap 2)Exercise 4: T-Account, Debit & Credit (Chap 2)

Use the information in each of the following separate cases to calculate the unknown amount:

• During October, Shandra Company had $97,500 of cash receipts and $101,250 of cash disbursements. The October 31 Cash balance was $16,800. What is the cash balance on September 30.

• On September 30, Li Ming Co. had a $97,500 balance in Accounts Receivable. During October, the company collected $88,950 from its credit customers. The October 31 balance in Accounts Receivable was $100,500. Determine the amount of sales on account that occurred in October.

• Nasser Co. had $147,000 of accounts payable on September 30 and $136,500 on October 31. Total purchases on account during October were $270,000. how much cash was paid on accounts payable during October.


Exercise 4: T-Account, Debit & Credit (Chap 2)Exercise 4: T-Account, Debit & Credit (Chap 2)

1) During October, Shandra Company had $97,500 of cash receipts and $101,250 of cash disbursements. The October 31 Cash balance was $16,800. What is the cash balance on September 30.

2) On September 30, Li Ming Co. had a $97,500 balance in Accounts Receivable. During October, the company collected $88,950 from its credit customers. The October 31 balance in Accounts Receivable was $100,500. Determine the amount of sales on account that occurred in October.

3) Nasser Co. had $147,000 of accounts payable on September 30 and $136,500 on October 31. Total purchases on account during October were $270,000. how much cash was paid on accounts payable during October.

Balance 9/30 20,550Cash Receipt 97,500 Cash Disburment 101,250Balance 10/31 16,800

Cash

Balance 9/30 97,500Credit Sales 91,950 Cash Collected 88,950Balance 10/31 100,500

Account Receivable

Balance 9/30 147,000Cash paid 280,500 Purchase 270,000

Balance 10/31 136,500

Account Payable


Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)

Roberto Ricci opens a computer consulting business called Viva Consultants and completes the following transactions in its first month of operations:

Apr. 1: Ricci invests $100,000 cash along with office equipment valued at $24,000 in the business.

Apr. 2: Prepaid $7,200 cash for twelve months' rent for office space.

Apr. 3: Made credit purchases for $12,000 in office equipment and $2,400 in office supplies. Payment is due within 10 days.

Apr. 6: Completed services for a client and immediately received $2,000 cash.

Apr. 9: Completed an $8,000 project for a client, who must pay within 30 days.

Apr. 13: Paid $14,400 cash to settle the account payable created on April 3.

Apr. 19: Paid $6,000 cash for the premium on a 12-month insurance policy.

Apr. 22: Received $6,400 cash as partial payment for the work completed on April 9.

Apr. 25: Completed work for another client for $2,640 on credit.

Apr. 28: Ricci withdrew $6,200 cash for personal use.

Apr. 29: Purchased $800 of additional office supplies on credit.

Apr. 30: Paid $700 cash for this month's utility bill.


Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)

Dr. Cr.

Cash 73,900PR Debit Credit Apr. 1 100,000 Apr. 2 7,200 Apr. 9 8,000 Apr. 22 6,400 Accounts Receivable 4,240

Apr. 1 Cash 101 100,000 Apr. 6 2,000 Apr. 13 14,400 Apr. 25 2,640 Office Supplies 3,200Office Equipment 163 24,000 Apr. 22 6,400 Apr. 19 6,000 Prepaid Rent 7,200

R. Ricci Capital 301 124,000 Apr. 28 6,200 Prepaid Insurance 6,000Apr. 30 700 Office Equipment 36,000

Apr. 2 Prepaid Rent 131 7,200 Bal. 73,900 Bal. 4,240 Accounts Payable 800Cash 101 7,200 R. Ricci Capital 124,000

R. Ricci Withdrawal 6,200Apr. 3 Office Equipment 163 12,000 Apr. 3 2,400 Apr. 2 7,200 Revenue 12,640

Office Supplies 124 2,400 Apr. 29 800 Expense 700Account Payable 201 14,400 137,440 137,440

Bal. 3,200 Bal. 7,200Apr. 6 Cash 101 2,000

Service Revenue 403 2,000Apr. 19 6,000 Apr. 1 24,000

Apr. 9 Account Receivable 106 8,000 Apr. 3 12,000Service Revenue 403 8,000

Bal. 6,000 Bal. 36,000Apr. 13 Account Payable 201 14,400

Cash 101 14,400Liability Accounts

Apr. 19 Prepaid Insurance 128 6,000Cash 101 6,000

Apr. 13 14,400 Apr. 3 14,400Apr. 22 Cash 101 6,400 Apr. 29 800

Account Receivable 106 6,400Bal. 800

Apr. 25 Account Receivable 106 2,640Service Revenue 403 2,640 Equity Accounts

Apr. 28 R.Ricci Withdraw 302 6,200Cash 101 6,200 Apr. 1 124,000 Apr. 28 6,200

Apr. 29 Office Supplies 124 800 Bal. 124,000 Bal. 6,200Account Payable 201 800

Apr. 30 Utility Expense 690 700 Apr. 6 2,000 Apr. 30 700Cash 101 700 Apr. 9 8,000

Apr. 25 2,640

Bal. 12,640 Bal. 700

Cash 101 Account Receivable 106Account Title

Prepaid Rent 131Office Supplies 124

Service Revenue 403 Utility Expense 690

Prepaid Insurance 128 Office Equipment 163

Accounts Payable 201

R. Ricci Capital 301 R. Ricci Withdrawal 302


Exercise 6: Adjusting Journal Entry (Chap 3)Exercise 6: Adjusting Journal Entry (Chap 3)

Prepare Adjusting Journal Entry for year ended at 12/31/2005

1) Depreciation on equipment for 2005 is $16,000

2) Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only $1,040 unexpired

3) Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was purchased. On 12/31/2005, physical count show $345 supplies remain.

4) Half of work related to$10,000 cash received in advance was performed in 2005.

5) Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that $4,600 coverage had expired.

6) Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005




1) Depreciation on equipment for 2005 is $16,000

12/31/2005 Dr. Depreciation Expense $16,000

Cr. Accumulated Depreciation – Equipment $16,000

To record depreciation expense for the year.

2) Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only $1,040 unexpired

12/31/2005 Dr. Insurance Expense $5,960

Cr. Prepaid Insurance $5,960

To record insurance coverage that expired ($7,000 - $1,040).

3) Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was purchased. On 12/31/2005, physical count show $354 supplies remain.

12/31/2005 Dr. Supplies Expense $2,626

Cr. Supplies $2,626

To record office supplies used ($300 + $2,680 - $354).

Bal. 12/31/2004 300Purchase 2,680 Usage 2,626

Bal. 354

Office Supplies




4) Half of work related to$10,000 cash received in advance was performed in 2005.

12/31/2005 Dr. Unearned Fee Revenue $5,000

Cr. Fee Revenue $5,000

To record earned portion of fee received in advance ($10,000 x 1/2).

5) Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that $4,600 coverage had expired.

12/31/2005 Dr. Insurance Expense $4,600

Cr. Prepaid Insurance $4,600

To record insurance coverage that expired.

6) Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005

12/31/2005 Dr. Wage Expense $4,000

Cr. Wage Payable $4,000

To record wages accrued but not yet paid.

© the mcgraw-hill companies, inc., 2006 mcgraw-hill/irwin1 review exercise chapter 1-3

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