CHAPTER 3 RECORDING TRANSACTIONS DISCUSSION QUESTIONS SOLUTIONS

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1 Instant download and all chapters Solutions Manual to accompany Accounting 9 Edition John Hoggett CHAPTER 3 RECORDING TRANSACTIONS DISCUSSION QUESTIONS SOLUTIONS 1. Indicate whether each of the following events is an internal transaction, an external transaction, or a non-transaction event. Explain your answer in each case: (a) Receipt of money from a customer in payment of services to be provided early in the next accounting period. (b) Equipment is used to provide a service for a customer (c) The human resources department provided services to the customer service department. (d) A building owned by the business increased in value (e) Received payment from a customer on account for services provided in the previous accounting period. (f) A prospective employee is interviewed and hired for a job (g) Stationery supplies are used by an employee. (a) (b) (c) (d) (e) External, because an event has happened between the entity and an outside party. Even though no service has yet been provided the receipt of money means that the entity now has a liability to either provide the service in the future or return the money. This needs to be recorded immediately. External and Internal. Even though the equipment has been used in the performance of a service to an outside party (external), the usage and wearing out of the equipment is usually recorded as an internal adjustment by way of depreciation on the equipment. Internal, as there needs to be a record kept within the entity of the provision of services between departments so that the cost of running each department may be accurately determined. Non-transaction event. However, if it is the practice of an entity to revalue such assets to show the higher value of the building, it would be recorded as an internal transaction, as there is no outside party involved. External, as there is an external party directly involved. Even though the provision of services would have been recorded in the previous period along with accounts receivable, the receipt of cash affects the cash at bank and reduces accounts receivable in the current period.

2 (f) (g) Non-transaction event, which is not recorded until an employee has begun work and has provided services to the entity Internal, as there is merely an adjustment inside the entity to reflect a change in value due to supplies being used. No external party is involved. 2. The owner of a very small, part-time business is very disorganised and doesn t like filing invoices, accounts and receipts. What is the point of keeping all that paper work?, he asks. Once the details have been recorded in the accounting system why waste time and space filing everything? Explain to the small business owner why it is important to keep supporting documentation and how such records are likely to be useful for future decision making and provide an example. There are two main reasons for keeping supporting documentation: a. It provides evidence of transactions and supports the entries into the accounting record; b. It serves as an important element in the control of the business resources, as discussed in the Business Knowledge section. The documentation would assist decision making as it usually provides details that are not recorded in the accounting system. For example, an electricity account will not only show the amount to be paid (expense) that would be recorded in the accounting system but also the amount of electricity being used. The amount of electricity used is not usually recorded in the accounting system, but being able to monitor this over time would help the business to control and reduce its power usage. If disputes ever arise with a supplier then supporting documentation is also likely to contain more detailed information to help resolve the issue than the accounting records would provide. 3. One often hears the statement: Debits are bad and credits are good for the business. Do you agree? Why or why not? This statement is nonsense. The debits and credits are merely double-entry rules for recording transactions and events. Even though expenses may be debit, so too are assets. Debit implies neither good or bad. Likewise for credits, which can be revenues or liabilities or equity. 4. Your friend is having difficulty grasping the rules of debits and credits. Using the idea that in some countries vehicles must travel on the left hand side of the road while in others they must travel on the right hand side of the road to explain the rules of debit and credit. In some countries, such as Australia, Hong Kong, Malaysia and Britain, vehicles must travel on the left hand side of the road. This is similar to Asset and Expense accounts which are increased with a debit, an entry on the left hand side of the general ledger account. In other countries, such as America, China and Europe, vehicles must travel on the right hand side of the road. This is similar to Liability, Equity and Income accounts which are increased with a credit, an entry on the right hand side of the general ledger account. There are historical reasons why in some countries vehicles travel on the left while in others they travel on the right. Similarly there are historical reasons why a debit is on the left of an account and is used to increase Assets and Expenses but decrease Liabilities, Equity and Income, and why a credit is on the right of an account and is used to increase Liabilities, Equity and Income but to decrease Assets and Expenses. Regardless of the historical reasons it is important to follow the rules, whether they are road rules or debit and credit rules, otherwise you will get into difficulty. A crash on the roads and incorrect accounts in accounting. In Australia we don t ask why? we drive on the left, we simply do so to avoid accidents. In China we don t ask why? we drive on the right, we just do so to keep out of trouble. This approach to debits and credits is often useful when first learning the rules of accounting. 5. Why are journals required as part of the recording process? Would not a set of ledger accounts be sufficient? Journals provide a chronological record of transactions and events affecting an entity. The general ledger does not, but classifies like transactions similarly. Hence, the purposes of the journal and ledger are different, but complement each other. 3.1

3 6. Give an example of a transaction that results in: (a) An increase in one asset and an increase in a liability (b) A decrease in one asset but no change in the total assets (c) An increase in one asset and an increase in equity (d) A decrease in one asset and a decrease in a liability (e) A decrease in one asset and a decrease in equity (f) One asset increasing, one asset decreasing and one liability increasing (g) A decrease in equity and an increase in a liability (a) Purchase of stationery on credit from a supplier which would increase Stationery Supplies Inventory and increase Accounts Payable. (b) Examples are purchase of supplies for cash and the collection of money from a customer who was part of accounts receivable. (c) The owner contributing an asset to the business such as cash or equipment or land or buildings. Earning income would increase either cash at bank or accounts receivable and also increase income, which by definition is an increase in equity. (d) Paying a supplier for goods or services purchased on credit would reduce cash at bank as well as the accounts payable. (e) If the owner took cash from the business bank account this would reduce cash at bank and equity by increasing drawings. Paying cash for an expense incurred by the business would.reduce the asset cash at bank and reduce equity by increasing expenses which are defined as decreases in equity. (f) Purchase of an asset (such as equipment or a building) in which a part payment is made and the balance of the purchase price is borrowed from a bank or finance company (g) The incurrence of an expense on credit or which is not yet paid for e.g. wages expense and wages payable. 7. Recently, a new student of accounting was overheard making the following remarks: Why are we learning how to use the double-entry system of recording in the accounting cycle? Surely there are good computer packages available these days which can handle all of these details. Provide a suitable reply. Students must know the accounting cycle manually so that they can determine what a computer package is doing in the accounting cycle, and so that they can correct any intentional and unintentional discrepancies which can arise from time to time in computer packages. Furthermore, some packages have their limitations and it is wise for the student to know what a package can and cannot do for the entity concerned. Much of this knowledge can be gained by preparing a set of accounts both manually and on computer. Furthermore, in practice, some small clients still do not use computers to keep their accounting records. By learning how to prepare accounts manually students learn the relationship between transactions in an entity and how they impact on the financial statements. Although this may be possible with a computer package the relationship is not as obvious. An accountant with experience should be able to look at the financial statements produced by a computer and tell if they are reasonable given their knowledge of the business. Understanding the accounting process in the detail required to be able to prepare manual accounts assists in developing these decision making skills. 8. Explain the fact that errors can exist even though the sum of the debit account balances may equal the sum of the credit account balances in the trial balance. Many errors do not affect the equality of debits and credits. Examples are an entry posted twice, or not at all, a debit or credit posted to the wrong account, or the wrong amount posted to both accounts. 3.2

4 9. Explain why when a business pays GST on the purchase of goods or services it records this as GST Receivable and an asset. When a business provides goods or services which are taxable it records the GST component of the transaction as GST Payable, a liability. When a business pays GST on purchasing goods or services it is allowed to offset this against and GST it owes to the Australian Taxation Office (ATO). The amount is called GST Receivable as it is either receivable from the ATO if the amount of GST paid exceeds the amount that the business receives from its customers or it at least reduces the amount of GST it has to pay to the ATO. The future economic benefit controlled by the entity that makes GST Receivable an asset is a reduction in future cash outflows to the ATO by reducing the amount of GST it has to forward to the ATO. When a business provides goods and services which are taxable under the GST legislation it is in effect collecting tax on behalf of the ATO which it is then liable to forward to the ATO. This is why this GST is called GST Payable and is a liability as it will result in a future cash outflow to the ATO. 10. The accountant of a goldmining company in Western Australia has to make a decision about whether to record an accounting transaction or not. The goldmining company discovered an extremely rich seam of gold as a result of exploration activities, 50 kilometres away from its already existing mines. This information, when released to the public, caused the share price of the company to jump considerably. What entries (if any) should the accountant make in the ledger of the company? Why? The accounting records for equity do not show increases in the market prices of the entity s shares in the financial statements. Hence, no entries are made for the increase in share prices. However, we need to consider as well whether the entity should recognise the existence of the new seam of gold as an asset. Consider this aspect in relation to the definition of an asset as presented in the text. 3.3

5 EXERCISE SOLUTIONS Exercise 3.1 Identifying account categories The following is a list of ledger account titles extracted from the general ledger of J. Wendall, marketing consultant: Wages and Salaries Interest Cash at Bank J. Wendall, Capital Accounts Payable Land (Under Mortgage) Furniture Accounts Receivable Motor Vehicles Rent Mortgage Payable Consultancy Fees Investments Computers Inventory, Marketing Materials Required A. Identify each of the ledger accounts as either an asset, a liability, an income or an expense account. If you think that any of the accounts might fit into more than one of these categories, explain why. B. For each of the accounts listed, indicate (a) whether increases are recorded as debits or credits and (b) whether the normal balance is a debit or a credit. A. B.(a) Increases B.(b) Normal balance 1. Wages and Salaries Expense debit debit 2. If Interest Revenue Income credit credit If Interest Expense Expense debit debit 3. Cash at Bank Asset debit debit 4. J. Wendall, Capital Equity credit credit 5. Accounts Payable Liability credit credit 6. Land (under mortgage) Asset debit debit 7. Furniture Asset debit debit 8. Accounts Receivable Asset debit debit 9. Motor Vehicles Asset debit debit 10. If Rent Revenue Income credit credit If Rent Expense Expense debit debit 11. Mortgage Payable Liability credit credit 12. Consultancy Fees Income credit credit 13. Investments Asset debit debit 14. Computers Asset debit debit 15. Inventory, Marketing Materials Asset debit debit 3.4

6 Exercise 3.2 Transaction analysis For each of the following transactions, indicate whether the accounts affected are an asset, a liability, an equity, an income or an expense. Also indicate whether the accounts are being increased or decreased and whether the increase or decrease is a debit or credit. Ignore GST. 1. Owner gave their personal computer to the business.. 2. Employed a secretary. 3. Cash payment made for insurance 6 months in advance. 4. Purchased supplies on credit. 5. Paid a creditor using an electronic transfer. 6. Invoiced a customer for services performed. 7. Owner paid for their personal groceries using the business credit card. 8. Paid some cash and took out a loan to purchase office furniture. 9. Received cash from a customer that owed the business money. 10. Paid for an advertisement aired on television. 1. Increase an asset (debit), increase equity (credit) 2. No transaction recorded. 3. Increase an asset (debit), decrease an asset (credit) 4. Increase an asset (debit), increase a liability (credit) 5. Decrease a liability (debit), decrease an asset (credit) 6. Increase an asset (debit), increase an income or revenue (credit) 7. Decrease equity (debit), increase a liability (credit) 8. Increase an asset (debit), decrease an asset (credit), increase a liability (credit) 9. Increase an asset (debit), decrease an asset (credit) 10. Increase an expense (debit), decrease an asset (credit). 3.5

7 Exercise 3.3 Effects of transactions on financial position The following transactions were undertaken by Massenburg Personnel Services during the month of February Ignore GST. 1. Invoiced a client for providing advice on current employment legislation, $ Paid salaries to staff, $ Paid an annual subscription for access to an online data base of employment legislation until the end of January Received $6000 from a client for employing staff for them in January. 5. M. Massenburg invested a further $ additional capital into the business to ensure it has sufficient cash to continue operations. 6. Purchased new office furniture and equipment on credit for $ Invoiced a client for $7000 for providing advice regarding an industrial dispute they had with their employees. 8. Paid $720 electricity account the day the account was received. 9. Paid the firm s lawyers for an account received from them in December for receiving legal advice, $ Paid for the equipment purchased in (6). 11. M. Massenburg withdrew $1200 from the business bank account for personal use. Required Indicate with the appropriate letter whether each of the transactions resulted in: (a) an increase in assets and a decrease in assets (b) an increase in assets and an increase in liabilities (c) an increase in assets and an increase in equity (d) a decrease in assets and a decrease in liabilities (e) a decrease in assets and a decrease in equity (f) an increase in liabilities and a decrease in equity (g) an increase in equity and a decrease in liabilities. 1. (c) increase in assets and an increase in equity 2. (e) a decrease in assets and a decrease in equity 3. (a) an increase in assets and a decrease in assets 4. (a) increase in assets and a decrease in assets, 5. (c) increase in assets and an increase in equity 6. (b) an increase in assets and an increase in liabilities 7. (c) increase in assets and an increase in equity 8. (e) a decrease in assets and a decrease in equity 9. (d) a decrease in assets and a decrease in liabilities 10. (d) a decrease in assets and a decrease in liabilities 11 (e) a decrease in assets and a decrease in equity 3.6

8 Exercise 3.4 Normal balance and classification in financial statements The accounts below appear in the chart of accounts of Brightspark Electrical Services. Show whether the normal balance is a debit or a credit. Indicate whether the account would appear in the balance sheet or in the income statement, and under what classification, e.g. liability, asset, equity, income or expense. 1. Service Vehicles 2. Repairs Expense 3. Prepaid Insurance 4. Accounts Payable 5. Unearned Service Fees 6. Telephone Expense 7. Accounts Receivable 8. Electrical Supplies 9. B.A. Brightspark, Drawings 10. GST Payable 11. GST Receivable 12. Mortgage Payable 13. Interest Revenu 14. B. A. Brightspark, Capital 15. Electrical Services Revenue Item BRIGHTSPARK ELECTRICAL SERVICES Normal Balance Statement 1. Service Vehicles Debit Balance sheet/statement of financial position (asset) 2. Repairs Expense Debit Income statement (expense) 3. Prepaid Insurance Debit Balance sheet/statement of financial position (asset) 4. Accounts Payable Credit Balance sheet/statement of financial position (liability) 5. Unearned Services Fees Credit Balance sheet/statement of financial position (liability) 6. Telephone Expense Debit Income statement (expense) 7. Accounts Receivable Debit Balance sheet/statement of financial position (asset) 8. Electrical Supplies Debit Balance sheet/statement of financial position (asset) 9. B.A, Brightspark, Drawings Debit Balance sheet/statement of financial position (deduction from equity) 10. GST Payable Credit Balance sheet/statement of financial position (liability) 11. GST Receivable Debit Balance sheet/statement of financial position (asset) 12. Mortgage Payable Credit Balance sheet/statement of financial position (liability) 3.7

9 13. Interest Revenue Credit Income Statement (income) 14. B.A. Brightspark, Capital Credit Balance sheet/statement of financial position (equity) 15. Electrical Services Revenue Credit Income Statement (income) 3.8

10 Exercise 3.5 Recording transactions in general journal and analysis The chart of accounts of Pellham Poster Printers contained the following accounts: Cash at Bank; Accounts Receivable; Equipment; Accounts Payable; K. Pellham, Drawings; Printing Fees; Salaries Expense and Advertising Expense. Ignore GST. The following transactions occurred during the month of June: June K. Pellham withdrew $850 cash for personal use. Purchased new equipment for $5000. Paid $500 deposit with the balance to be paid within 60 days. Paid for advertising in the local newspaper, $510. Paid $320 to creditors for office supplies that had been purchased on credit in the previous month. Paid salaries of $970. Received $500 from customers to reduce their account balances. $ in printing fees were due during the month. Of this, 20% of the fees were collected in cash and 80% will be paid within 60 days. Required A. Prepare the general journal entries to record the transactions (ignore GST). B. For each transaction above, prepare an analysis similar to those shown in illustrative examples in this chapter of the text. A. PELLHAM POSTER PRINTERS (ignoring GST) June 1 K. Pellham, Drawings $850 Cash at Bank $850 K. Pellham withdrew $850 for personal use. 5 Equipment Cash at Bank 500 Accounts Payable Purchased equipment for cash $500 and the balance payable in 60 days. 9 Advertising Expense 510 Cash at Bank 510 Payment for newspaper advertisements. 14 Accounts Payable 320 Cash at Bank 320 Payment to suppliers. 18 Salaries Expense 970 Cash at Bank 970 Payment for newspaper advertisements. 22 Cash at Bank

11 Accounts Receivable 500 Cash receipts from credit customers. 30 Cash at Bank Accounts Receivable Printing Fees Revenue Printing fees received and receivable. 3.10

12 B. June 1 This transaction is a withdrawal of assets from the business by the owner and is not an expense related to the earning of income. A debit is made to the Drawings account to reflect the decrease in the owner s investment in the business, and the decrease in the Cash at Bank account is recorded by a credit. 5 The Equipment account is increased to record the purchase by debiting the account. At the same time, Cash at Bank is decreased by crediting the account for the amount of the deposit paid, and a liability, Accounts Payable is increased by crediting the account for the amount payable in 60 days. 9 Advertising costs are an expense of the business to reflect the cost of advertising services received as supplied by the newspaper. The business pays the newspaper for the services rendered to the business by crediting the Cash at Bank account and debiting the Advertising Expense account. 14 The supplies had been purchased in the previous month; hence, an Accounts Payable liability account would have been credited at that time. This month, the payment of the Accounts Payable is recorded by reducing the liability account (debit) and reducing the Cash at Bank account (credit) for the amount of the payment. 18 Salaries are an expense of the business to reflect the cost of services received by the business from its employees. The business pays its employees for the services they have rendered to the business by crediting the Cash at Bank account and debiting the Salaries Expense account. 22 The receipt of cash from credit customers is recorded by a debit to the Cash at Bank account; and Accounts Receivable is credited to reduce the amount owing to the business by these customers. Services have previously been supplied to the customers by the business, and this transaction reflects the receipt of cash from these customers. 30 This is an income transaction reflecting the amount of printing fees received or receivable for the month of June. Hence, a revenue account, called Printing Fees Revenue, is credited and Cash at Bank is debited for the amount received from customers who paid in cash. For credit customers, an asset, Accounts Receivable, is debited to record the amount owing by these customers for services received by them from the business in June. 3.11

13 Exercise 3.6 Account titles and type Each of the following items describes aspects of the business of Lenny Linnehan, lawyer: 1. cash which Lenny Linnehan has withdrawn from the business for personal use 2. photocopiers, document binding machine and computers 3. amounts owing by the business to suppliers of an online legal database 4. amounts owing by customers for cases completed 5. tables, wall shelving and book cabinets for staff offices 6. GST charged to clients for legal services 7. money borrowed from a bank 8. lease rental on premises which should have been paid 1 month ago 9. supplies held for future document preparation 10. insurance premium paid in advance to cover the next 6 months. Required A. Suggest an account title for each item described. B. Classify the item as an asset, liability, equity, income or expense. 1. L. Linnehan, Drawings Equity 2. Office Equipment Asset 3. Accounts Payable Liability 4. Accounts Receivable Asset 5. Office Equipment Asset 6. GST Payable Liability 7. Bank Overdraft/Loan Payable Liability 8. Rent Payable Liability 9. Office Supplies Asset 10. Prepaid Insurance Asset 3.12

14 Exercise 3.7 Chart of accounts, posting to T accounts and trial balance The general journal of Lenore Grunweld, Property Adviser, contained the entries below for the month of July GST is ignored. General Journal Post Date 2016 July 1 Cash at Bank Particulars Debit Credit Lenore Grunweld, Capital (Cash invested by owner) 9 Cash at Bank Service Fees Revenue (Fees for services performed) 16 Office Equipment Cash at Bank Accounts Payable (Office equipment for cash and on credit) 22 Service Fees Receivable Service Fees Revenue (Services performed on credit) 31 Cash at Bank Service Fees Receivable (Cash received from client) Required A. Post the transactions to T accounts. The chart of accounts for the business included the following accounts: Cash at Bank Service Fees Receivable Office Equipment Accounts Payable Lenore Grunweld, Capital Service Fees Revenue

15 B. Prepare a trial balance of the general ledger of Lenore Grunweld, Property Adviser as at 31 July A. July 1 Lenore Grunweld, Capital Cash at Bank $ July 16 Office Equipment $3 200 July 9 Service Fees July 31 Balance c/d July 31 Service Fees Receivable July 31 Balance b/d July 22 Service Fees Revenue July 31 Balance b/d Service Fees Receivable $ July 31 Cash at Bank $ July 31 Balance c/d Office Equipment July 16 Cash at Bank/Accounts Payable $ Accounts Payable July 16 Office Equipment $ Lenore Grunweld, Capital July 1 Cash at Bank $ Service Fees Revenue July 9 Cash at Bank $ July 31 Balance c/d July 22 Serv. Fees Rec ble July 31 Balance b/d B. LENORE GRUNWELD, FINANCIAL ADVISER Trial Balance as at 31 July 2016 Account Account Debit Credit 3.14

16 No. Cash at Bank $ Service Fees Receivable Office Equipment Accounts Payable $ Lenore Grunweld, Capital Service Fees Revenue $ $

17 Exercise 3.8 Recording transactions in general journal and analysis The following accounts appear in the ledger of the Henrietta s Huge Hair Hairdressers: Cash at Bank; Accounts Receivable; Hairdressing Equipment; Accounts Payable; Henrietta Bouffant, Drawings; Hairdressing Revenue; Salaries Expense; and Advertising Expense. Required A. Prepare the general journal entries to record the transactions that occurred during December (ignore GST). B. Explain why you have made each of the journal entries to account for the transactions. Dec Purchased hair drying equipment for $ Paid $5000 deposit and agreed to pay the balance in 60 days. Henrietta withdrew $1200 from the business to buy herself a new dress for a friend s wedding. Paid salaries of $6800. Paid $800 for advertisements in the local newspaper. Received $540 from customers to reduce the balance in their accounts. Paid $3700 to creditors for supplies that had been purchased on credit. Earned $ in hairdressing revenue during the month. Of these, 80% of the fees were collected in cash and 20% will be paid within a month. HENRIETTA S HUGE HAIR HAIRDRESSERS (ignore GST) Dec. 1 Hairdressing Equipment Cash at Bank Accounts Payable Purchased hair drying equipment for cash and on credit. 3 H. Bouffant, Drawings Cash at Bank Cash withdrawn by owner. 8 Salaries Expense Cash at Bank Salaries paid. 14 Advertising Expense 800 Cash at Bank 800 Cash paid for radio commercials. 19 Cash at Bank 540 Accounts Receivable 540 Cash received from credit customers 23 Accounts Payable Cash at Bank

18 Cash paid to suppliers. 30 Cash at Bank Accounts Receivable Hairdressing Revenue Memberships fees earned. B. December 1 The Hairdressing Equipment account is increased to record the purchase by debiting the account. At the same time, Cash at Bank is decreased by crediting the account for the amount of the deposit paid, and a liability, Accounts Payable is increased by crediting the account for the amount of $ payable in 60 days. 3 This transaction is a withdrawal of assets from the business by the owner and is not an expense related to the earning of income. A debit is made to the Drawings account to reflect the decrease in the owner s investment in the business, and the decrease in the Cash at Bank account is recorded by a credit. 8 Salaries are an expense of the business to reflect the cost of services received by the business from its employees. The business pays its employees for the services they have rendered to the business by crediting the Cash at Bank account and debiting the Salaries Expense account. 14 Advertising costs are an expense of the business to reflect the cost of advertising services received as supplied by the newspaper. The business pays the newspaper for the services rendered to the business by crediting the Cash at Bank account and debiting the Advertising Expense account. 19 The receipt of cash from credit customers is recorded by a debit to the Cash at Bank account; and Accounts Receivable is credited to reduce the amount owing to the business by these customers. Services have previously been supplied to the customers by the business, and this transaction reflects the receipt of cash from these customers. 23 The supplies had been purchased on a previous occasion; hence, an Accounts Payable liability account would have been credited at that time. Now, the payment of the Accounts Payable is recorded by reducing the liability account (debit) and reducing the Cash at Bank account (credit) for the amount of $ This is an income transaction reflecting the amount of hairdressing revenue earned (received or receivable) for the month of December. Hence, a revenue account, called Hairdressing Revenue, is credited and Cash at Bank is debited for the amount received from customers who paid in cash. For credit customers, an asset, Accounts Receivable, is debited to record the amount owing by these customers for services received by them from the business in December. 3.17

19 Exercise 3.9 Recording transactions in general journal and analysis The following information relates to the business of Man Ting s Travel Agency for the month of June 2016: June Man Ting Lau invested $ cash into the new business. The business set up an office by purchasing some office equipment for $ cash. Man Ting hired an assistant to deal with customers for an annual salary of $42 000, payable in monthly amounts. The assistant books a holiday to Europe for a client, Wing Ho, for a total cost of $ (unpaid at this stage). The commission to be kept by the business is 10% of the total cost of the trip when Wing Ho pays in full. Wing Ho pays $ to Man Ting s Travel Agency. Of this amount, $4200 represents the total cost of air fares, which will be forwarded to the airline concerned; and the remainder (excluding the travel agency s commission) is to be forwarded to a particular hotel chain to cover the client s accommodation. The business pays cash to the airline as payment for Wing Ho s trip. The appropriate amount of cash is paid to the hotel chain for Wing Ho s trip. The assistant is paid 1 month s wages in cash. Required A. Prepare general journal entries to record the above events, as appropriate, in the accounting records of Man Ting s Travel Agency. Ignore GST. B. Explain why you have made each entry by providing analyses similar to those shown in the illustrative example in the chapter of the text (p.91). MAN TING S TRAVEL AGENCY (ignore GST) 2016 June 1 Cash at Bank Man Ting Lau, Capital Cash contributed by owner. 2 Office Equipment Cash at Bank Office equipment purchased for cash 3 No entry required 6 No entry required at this point (the booking may be cancelled!?) 15 Cash at Bank Accounts Payable Commission Income Cash received as part payment for airlines and hotel. 22 Accounts Payable Cash at Bank Cash paid to airline. 3.18

20 25 Accounts Payable Cash at Bank Cash paid to hotel chain as part payment. 30 Wages Expense Cash at Bank Cash paid for one month s wages to employee Note: Commission income is recognised above as cash is received even though, under the contract, the agency is not entitled to the income until the client pays in full. An argument could also be put with students that the total commission income of $1600 could be recorded on 6 June, when the trip is booked for the client. Questions to consider: Has the income been earned? Is it probable that it will be received? [Use AASB 118 paragraph 20 (revenue from services) as a guide]. B. June 1 This transaction is an investment of cash assets into the business by the owner. A credit is made to the Capital account (equity) to reflect the increase in the owner s investment in the business, and the increase in the Cash at Bank account (asset) is recorded by a debit. 2 The Office Equipment account is increased to record the purchase by debiting the account. At the same time, Cash at Bank is decreased by crediting the account for the amount of the cash paid. 3 No entry is made at this time as the hiring of staff does not represent a transaction. The assistant is owed nothing as he/she has not yet performed any services for the business. 6 No entry is made at this date as there is no clear evidence that the entity has performed services, and it is possible that the booking may be cancelled without any penalty. [However, an argument could be mounted that part of the income could be recognised if para. 20 if AASB 118 Revenue is considered to apply and the percentage of completion of the services can be determined in a faithful, verifiable manner.] 18 This is an income transaction reflecting the amount of commission earned on the cash received to date from the client. Hence, an income account, called Commission Income, is credited for 10% of the cash received, and Cash at Bank is debited for the amount received from the customer. A liability, Accounts Payable, is credited to record the amount owing by the business to the airline and to the hotel chain. 22 The Accounts Payable liability account was credited at that time the amount of cash was received from the customer. Now, the payment of the Accounts Payable to the airline is recorded by reducing the liability account (debit) and reducing the Cash at Bank account (credit) for the amount of $ The Accounts Payable liability account was credited at that time the amount of cash was received from the customer. Now, the payment of the Accounts Payable to the hotel chain is recorded by reducing the liability account (debit) and reducing the Cash at Bank account (credit) for the amount of $4200, namely 3.19

21 $9000 $ Wages are an expense of the business to reflect the cost of services received by the business from its employees. The business pays the assistant for the services he/she has rendered to the business for the month by crediting the Cash at Bank account and debiting the Wages Expense account. 3.20

22 Exercise 3.10 Recording transactions in general journal and general ledger In December 2016, the following transactions occurred in Macchiato s Coffee Roasters business that supplies cafés and also sells direct to the public: Dec. 2 Michael Macchiato invested $ into the business of Macchiato s Coffee Roasters by purchasing a fully equipped coffee roasting business. The business acquired consisted of the following assets and liabilities: Land $ Building Coffee roasting equipment Office equipment Accounts payable Purchased some new roasting equipment on credit for $ Collected cash from customers for the month, $ Paid the accounts payable owing on 2 December when Michael purchased the business. Purchased an insurance policy for the year for $6000 cash. Purchased television advertising for the Christmas New Year period for $8000 to be paid for in 30 days. Collected fees in cash from customers for the Christmas New Year period, amounting to $ Michael withdrew $8000 cash in order to pay for private Christmas presents and parties. Required A. Prepare general journal entries for each of the above transactions and events. B. Post the entries to ledger T accounts and balance the accounts as at 31 December A. MACCHIATO S COFFEE ROASTERS (ignore GST) Dec. 2 Land Building Coffee Roasting Equipment Office Equipment Accounts Payable Michael Macchiato, Capital Assets and liabilities contributed by the owner 5 Coffee Roasting Equipment Accounts Payable Purchase of roasting equipment on credit 6 Cash at Bank Coffee Sales Cash received for coffee sales for December. 12 Accounts Payable

23 Cash at Bank Cash paid for creditor for roasting equipment. 14 Prepaid Insurance Cash at Bank Cash paid in advance for insurance policy. 18 Advertising Expense* Accounts Payable Advertising costs over the holiday period 23 Cash at Bank Coffee Sales Coffee sales received for the holiday period. 30 Michael Macchiato, Drawings Cash at Bank Cash withdrawn by owner * Alternatively, debit Prepaid Advertising (asset), as not all of the expense applies to the month of December. B. Cash at Bank Dec 6 Coffee Sales Dec 12 Accounts Payable Coffee Sales Prepaid Insurance Balance c/d Michael Macchiato, Drawings Balance c/d Land Dec 2 Macchiato, Capital Building Dec 2 Macchiato, Capital Coffee Roasting Equipment Dec 2 Macchiato, Capital Accounts Payable Dec 31 Balance c/d

24 31 Balance b/d Dec 1 Michael Macchiato, Capital Office Equipment Prepaid Insurance Dec 14 Cash at Bank Accounts Payable Dec 12 Cash at Bank Dec 2 Macchiato, Capital Balance c/d Coffee Roasting Equipment 18 Advertising Expense Dec 31 Balance b/d Michael Macchiato, Capital Dec 2 Various Assets and Acc s payable Michael Macchiato, Drawings Dec 30 Cash at Bank Coffee Sales Dec 6 Cash at Bank Dec 31 Balance c/d Cash at Bank Balance b/d Advertising Expense Dec 18 Cash at Bank

25 3.24

26 Exercise 3.11 Analysing ledger accounts Kelly s Cleaning Services T accounts for 30 April 2017 were as follows: Cash at Bank Cleaning Equipment 2/ / / / / Loan Payable 10/ Vehicle 10/ Chris Kelly, Capital 2/ Cleaning Supplies 9/ Required Analyse the above accounts and describe in chronological order the transactions that have been recorded April 2 Chris Kelly invested $ cash into the business. 5 Purchased cleaning equipment for cash, $ Purchased cleaning supplies for cash, $ A vehicle was purchased for a cost of $60 000, the owner paying cash of $ and the remaining $ being borrowed from a financial institution. 3.25

27 Exercise 3.12 Identifying and explaining errors When processing the accounts for Ellise s Electrical Contractors, the following errors were made: (a) Electrical equipment purchased for $7800 cash was debited to Equipment and credited to Accounts Payable for an incorrect amount of $8700. (b) Collection of an account receivable for $4500 was recorded by a debit to Cash at Bank and a debit to the equity account of the owner. (c) A cheque for $6000 issued to pay for an account payable was recorded as a debit to Accounts Payable and a credit to Accounts Receivable for $6000. (d) A $2100 payment for assorted electrical tools was recorded as a debit to Equipment and a credit to Cash at Bank for $210. (e) Cash of $2000 withdrawn by the owner from the business was debited to Salaries Expense and credited to Cash at Bank. Required A. Identify which of the above errors would cause unequal totals in a trial balance prepared at the end of the period. B. Write a brief explanation for each error to indicate how it could be fixed in the accounting records. A. (a) (b) (c) (d) (e) B. (a) The trial balance will still balance in spite of this error as there is an equal debit and credit for $8700, even though the credit to the Accounts Payable account was incorrect. The correct entry should have been to debit Office Equipment and credit Cash at Bank for the amount of $8700. There should have been a credit to Accounts Receivable instead of a debit to the Capital account. This will cause an unequal total in the trial balance because two debit entries were recorded in error, and no credit. The trial balance will still balance in spite of this error as there is an equal debit and credit for $6000, even though the wrong account was credited. The trial balance will still balance in spite of this error, as the debit and credit were both equal to $210. The trial balance will still balance in spite of this error as there is an equal debit and credit for $2000, even though the wrong account was debited. To fix this error, the following journal entry is needed: Accounts Payable Electrical Equipment 900 Cash at Bank Correcting errors made in certain asset and liability accounts This entry will bring the balance in the Office Equipment account to its correct amount of $7800, as $900 is deducted from the amount already recorded. $8700 is reversed out of the Accounts Payable account and the correct amount of $7800 is then credited to Cash at Bank. (b) In order to fix this error, the error in the Capital account will need to be eliminated by crossing out the amount of $4500 from the account; and the debit in the Accounts 3.26

28 (c) (d) (e) Receivable account for $4500 will need to be crossed out and then the amount will need to be credited to the account. To fix this error, the entity needs to record another journal entry to debit Accounts Receivable and to credit Cash at Bank for $6000. To fix this error, there will need to be an additional journal entry to debit the Equipment account and credit the Cash at Bank account for $1890. To fix this error, the entity needs to record another journal entry to debit the Drawings account and to credit Salaries Expense for $

29 Exercise 3.13 Preparation of corrected trial balance Nigel s Gardening Services trial balance presented below does not balance. In examining the general journal and the general ledger you discover the following information. Ignore GST. 1. The balance in the Mortgage Payable account is $5400. To fix 900 credit 2. A purchase of lawnmower fuel for cash of $180 was erroneously recorded as a purchase on credit. Dr accounts payable Cr Cash $180 no overall impact 3. The debits and credits to Accounts Receivable totalled $7600 and $5400 respectively.$2200 balance instead of 530. Dr increase by A $550 payment for salaries was not posted to the Cash at Bank account. Cr cash 5. The debit to record a withdrawal of $600 in cash by the owner was not posted. Dr drawings Overall impact =820.Will not correct the difference below of NIGEL S GARDENING SERVICES Trial Balance as at 30 June 2016 Account Debit Credit Cash at bank Accounts receivable Supplies Equipment $ Accounts payable Salaries payable Mortgage payable Nigel Mower, Capital $ Nigel Mower, Drawings Service revenue Salaries expense Rent expense Other expense $ $ Need 1470 debit to fix 3.28

30 Required Prepare a corrected trial balance. NIGEL S GARDENING SERVICES Trial Balance as at 30 June 2016 Debit Cash at bank $1 670 Accounts receivable Supplies 8200 Equipment 420 Credit Accounts payable $1980 Salaries payable 2980 Mortgage payable Nigel Mower, Capital Nigel Mower, Drawings Service revenue Salary expense Rent expense Other expense $ $

31 Exercise 3.14 Effect of errors on trial balance A. For each of the following errors: (a) indicate whether the error would cause the trial balance to have unequal totals (b) determine the amount by which the trial balance totals would differ (c) determine whether the error would cause the debit total or the credit total to be larger. Ignore GST. 1. A $280 credit to Service Revenue was not posted. 2. Receipt of a payment on account from a customer was recorded as a debit to Cash at Bank for $125 and a credit to Accounts Payable for $ A purchase of supplies for $57 was recorded as a debit to Supplies for $57 and a credit to Accounts Payable for $ A $33 debit to Cash at Bank was posted as a credit. 5. A $250 debit to the Drawings account was debited to the Capital account. 6. A $520 debit to Rent Expense was posted as a $52 debit. B. How would each error be corrected? Give the correcting journal entry where appropriate. A and B. 1. (a) Unequal totals B. post credit of $280 to Service (b) Differ by $280 Revenue account (c) Debit total larger 2. (a) Equal totals Accounts Payable 125 Accounts Receivable (a) Unequal totals Cross out $75 credit and enter (b) Differ by $18 (divisible by 9) correct amount of $57 (c) Credit total larger 4. (a) Unequal totals Cross out incorrect credit and (b) Differ by $33 post correct debit (c) Credit total larger 5. (a) Equal totals Drawings 250 Capital (a) Unequal totals Cross out $52 and enter correct (b) Differ by $468 amount of $520 (c) Credit total larger 3.30

32 PROBLEM SOLUTIONS Problem 3.1 Identifying type of account, debit/credit analysis and normal Balance Tsz Yeung Printers ledger accounts are listed below: 1. Accounts Payable 2. Accounts Receivable 3. Buildings 4. Cash at Bank 5. Electricity Account Payable 6. GST Payable 7. GST Receivable 8. Insurance Expense 9. Interest Expense 10. Interest Receivable 11. Interest Revenue 12. Land 13. Loan Payable 14. Mortgage Payable 15. Prepaid Insurance 16. Printing Equipment 17. Rent Revenue 18. Service Fee Revenue 19. Sundry Revenue 20. Supplies on Hand 21. Supplies Used 22. Tsz Yeung, Capital 23. Tsz Yeung, Drawings 24. Unearned Revenue 25. Wages Expense 26. Wages Payable Required A. For each account listed below, complete a solution form as shown below by placing a tick in the proper columns to indicate the type of account, the side of a T account on which increases are recorded, and the side on which normal balances are recorded. B. Prepare an appropriate chart of accounts for the business. Use the following digits for account classes: assets, 1; liabilities, 2; equity, 3; income, 4; expenses, 5. Within each category, assign a 3-digit code for each account. A. Type of Account Increases Normal balance Account Asset Liability Equity Debit Credit Debit Credit (includes income and expenses) 1. Accounts Payable 2. Accounts Receivable 3. Buildings 4. Cash at Bank 5. Electricity Acc Payable. 6. GST Payable 7 GST Receivable 8. Insurance Expense 9. Interest Expense 10. Interest Receivable 3.31

33 11. Interest Revenue 12. Land 13. Loan Payable 14. Mortgage Payable 15. Prepaid Insurance 16. Printing Equipment 17. Rent Revenue Account Asset Liability Type of Account Increases Normal balance Equity (includes income and expenses) Debit Credit Debit Credit 18. Service Fee Revenue 19. Sundry Revenue 20. Supplies on Hand 21. Supplies Used 22. Tsz Yeung, Capital 23. Tsz Yeung, Drawings 24. Unearned Revenue 25. Wage Expense 26. Wages Payable 3.32

34 B. TSZ YEUNG PRINTERS CHART OF ACCOUNTS Assets ( ) Cash at Bank 100 Accounts Receivable 110 GST Receivable 115 Prepaid Insurance 120 Interest Receivable 130 Supplies on Hand 140 Printing Equipment 150 Land 180 Buildings 190 Liabilities ( ) Accounts Payable 200 GST Payable 205 Wages Payable 210 Electricity Account Payable 220 Loan Payable 230 Unearned Revenue 240 Mortgage Payable 250 Equity ( ) Tsz Yeung, Capital 300 Tsz Yeung, Drawings 310 Income ( ) Service Fee Revenue 400 Rent Revenue 410 Interest Revenue 420 Sundry Revenue 430 Expenses ( ) Wages Expense 500 Supplies Used 510 Insurance Expense 520 Interest Expense 530 Profit or Loss Summary

35 Problem 3.2 Journal entries, posting to ledger and trial balance On 1 July 2015 Nicole Andreou opened a beauty parlour. The following transactions occurred during the first month of operations (ignore GST): July Andreou invested $ in the business by depositing cash into a business cheque account with the Eastpac Bank. Paid $1800 for the first month s rent. Purchased equipment by an online bank transfer for $ and signing a commercial loan agreement for $ Purchased supplies for $8400. Paid advertising expense of $890. Recorded beauty services revenue for the first half of the month of $3250 in cash and $620 on credit. Paid insurance expense for July of $480 using an online bank transfer. Received a $140 payment from customers who paid on credit in the first half of the month. Andreou withdrew $560 cash for personal living expenses. Recorded revenue for the second half of the month of $3680 in cash and $580 on credit. Paid telephone account of $330 by electronic transfer. Use the following account titles and numbers: Cash at Bank, 100; Accounts Receivable, 101; Supplies, 102; Equipment, 103; Loan Payable, 200; Nicole Andreou, Capital, 300; Nicole Andreou, Drawings, 301; Revenue, 400; Rent Expense, 500; Advertising Expense, 501; Insurance Expense, 502; Telephone Expense, 503. Required A. Prepare the general journal entries to record the transactions. B. Post the entries from the general journal to the general ledger accounts (running balance format) and enter the posting references in the general journal. C. Prepare a trial balance as at 31 July A. General Journal July 2 Cash at Bank Nicole Andreou, Capital Cash invested by owner. 2 Rent Expense Cash at Bank Rent paid. 3 Equipment Cash at Bank Loan Payable Equipment purchased for cash and loan payable. 4 Supplies