C H A P T E R 2 Analyzing Transactions QUIZ AND TEST HINTS The following hints may be helpful to you in preparing for a quiz or a test over the material covered in Chapter 2. 1. Terminology is important in this chapter. Review the Key Terms section at the end of the chapter and be sure you understand each term. Do the Matching and Fill-in-the-Blank exercises included in this Study Guide. Pay special attention to major account classifications discussed on page 55 of the text. 2. Memorize the Rules of Debit and Credit and the Normal Balances of Accounts that are summarized in Exhibit 3 on page 57. All instructors will ask questions to test your knowledge of these items. 3. Be able to prepare general journal entries for the types of transactions presented in this chapter. Review the illustration beginning on page 58, and be sure you understand each entry. Be especially careful not to confuse debits and credits. Remember that a credit is indented slightly to the right when preparing a general journal entry. A good review is to rework the Illustrative Problem. 4. You should be familiar with the process of posting accounts for working assigned problems. However, you will probably not be required to post accounts on an examination. 5. You may be required to prepare an unadjusted trial balance from a list of accounts with normal balances. 6. You might expect one or two questions on how to correct errors. These types of questions may require you to prepare a correcting journal entry. Review the section of the chapter and illustration containing this information. 7. Review the GPS graphic at the beginning of the chapter and the At A Glance section at the end of the chapter. Read and review each of the Key Points and related Learning Outcomes. For each Learning Outcome that has an Example Exercise, locate the Example Exercise in the chapter and be sure that you understand the solution and can work a similar item on a test. If you have any questions about an Example Exercise, read the section of the chapter immediately preceding the Example Exercise. 15
16 Chapter 2 8. If your instructor covers the Financial Analysis and Interpretation item at the end of the chapter, you should know how to compute and interpret horizontal analysis.
Name: Chapter 2 17 MATCHING Instructions: Match each of the statements below with its proper term. Some terms may not be used. A. account B. assets C. balance of the account D. chart of accounts E. credit balance F. credits G. debit balance H. debits I. dividends J. double-entry accounting K. expenses L. journal M. journal entry N. journalizing O. ledger P. liabilities Q. posting R. revenues S. slide T. stockholders equity U. T account V. transposition W. trial balance X. two-column journal Y. unearned revenue 1. An accounting form that is used to record the increases and decreases in each financial statement item. 2. A group of accounts for a business. 3. A list of the accounts in the ledger. 4. Resources that are owned by the business. 5. Debts owed to outsiders (creditors). 6. The stockholders right to the assets of the business. 7. Increases in stockholders equity as a result of selling services or products to customers. 8. Assets used up or services consumed in the process of generating revenues. 9. The simplest form of an account. 10. Amounts entered on the left side of an account. 11. Amounts entered on the right side of an account. 12. The amount of the difference between the debits and the credits that have been entered into an account. 13. The initial record in which the effects of a transaction are recorded. 14. The process of recording a transaction in the journal. 15. The form of recording a transaction in a journal. 16. A system of accounting for recording transactions, based on recording increases and decreases in accounts so that debits equal credits.
17. The account used to record amounts of earnings distributed to stockholders of a corporation. 18. The process of transferring the debits and credits from the journal entries to the accounts. 19. An all-purpose journal. 20. The liability created by receiving revenue in advance. 21. A summary listing of the titles and balances of accounts in the ledger. 22. The normal balance of the cash account. 23. The normal balance of the fees earned account. 24. An error in which the order of the digits is changed, such as writing $542 as $452 or $524. 25. An error in which the entire number is moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00. FILL IN THE BLANK PART A Instructions: Answer the following questions or complete the statements by writing the appropriate words or amounts in the answer blanks. 18
Name: Chapter 2 19 1. An accounting form that is used to record the increases and decreases in each financial statement item is the. 2. A list of the accounts in the ledger is called the. 3. Increases in stockholders equity as a result of selling services or products to customers are called. 4. The simplest form of an account is the. 5. Amounts entered on the left side of an account are. 6. An increase in Accounts Receivable is recorded by a entry in the account. 7. An increase in Capital Stock is recorded by a entry in the account. 8. A decrease in Accounts Payable is recorded by a entry in the account. 9. A decrease in Salaries Expense is recorded by a entry in the account. 10. Unearned Revenue is a(n) account. 11. A decrease in Cash is recorded by a entry in the account. 12. The normal balance of the supplies account is a balance. 13. The normal balance of Retained Earnings is a balance. 14. The initial record in which the effects of a transaction are recorded is the. 15. The process of recording a transaction in the journal is called. 16. The - is a system of accounting for recording transactions, based on recording increases and decreases in accounts so that debits equal credits. 17. The process of transferring the debits and credits from the journal entries to the accounts is called. 18. An all-purpose journal is the -. 19. Fees earned on account would be recorded by debiting the account. 20. An error in which the order of the digits is changed mistakenly, such as writing $542 as $452 or $524, is called a(n).
20 Chapter 2 FILL IN THE BLANK PART B Instructions: Answer the following questions or complete the statements by writing the appropriate words or amounts in the answer blanks. 1. A group of accounts for a business is called a(n). 2. Resources that are owned by the business are called. 3. Debts owed to outsiders (creditors) are of the business. 4. The stockholders right to the assets of the business is the. 5. Assets used up or services consumed in the process of generating revenues are reported as. 6. Amounts entered on the right side of an account are. 7. The amount of the difference between the debits and the credits that have been entered into an account is the of the account. 8. The recording of a transaction in a journal is called. 9. The account is used to record distribution of earnings to stockholders of a corporation. 10. is the liability created by receiving the revenue in advance. 11. A decrease in Notes Payable is recorded by a entry in the account. 12. An increase in Dividends is recorded by a entry in the account. 13. A decrease in Accounts Receivable is recorded by a entry in the account. 14. Wages Payable is a(n) account. 15. Patent Rights is a(n) account. 16. The normal balance of the prepaid insurance account is a balance. 17. The normal balance of the fees earned account is a balance. 18. A summary listing the titles and balances of accounts in the general ledger is called a(n). 19. An error in which the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00, is called a(n). 20. A entry is made for errors that have been journalized and posted.
Name: Chapter 2 21 MULTIPLE CHOICE Instructions: Circle the best answer for each of the following questions. 1. The receipt of cash from customers in payment of their accounts would be recorded by a: a. debit to Cash and a credit to Accounts Payable b. debit to Cash and a credit to Accounts Receivable c. debit to Cash and a credit to Fees Earned d. debit to Cash and a credit to Fees Expense 2. In recording a transaction in a two-column journal, which of the following is done first? a. list the account to be credited b. list the amount to be credited c. list the amount to be debited d. list the account to be debited 3. The dividends account of a corporation is debited when: a. additional capital stock is issued b. earnings are distributed to stockholders c. a liability is paid d. an expense is paid 4. The equality of debits and credits in the ledger should be verified at the end of each accounting period by preparing a(n): a. accounting statement b. balance report c. trial balance d. account verification report 5. Of the following errors, the one that will cause an inequality in the trial balance totals is: a. incorrectly computing an account balance b. failure to record a transaction c. recording the same transaction more than once d. posting a transaction to the wrong account 6. Credits to cash result in: a. an increase in stockholders equity b. a decrease in assets c. an increase in liabilities d. an increase in revenue 7. Debits to expense accounts signify: a. increases in stockholders equity
22 Chapter 2 b. decreases in stockholders equity c. increases in assets d. decreases in liabilities 8. When rent is prepaid for several months in advance, the debit is to: a. an expense account b. a revenue account c. a liability account d. an asset account 9. When an asset is purchased on account, the credit is to: a. a stockholders equity account b. a revenue account c. a liability account d. an expense account 10. When a payment is made to a supplier for goods previously purchased on account, the debit is to: a. an asset account b. a liability account c. a stockholders equity account d. an expense account
Name: Chapter 2 23 TRUE/FALSE Instructions: Indicate whether each of the following statements is true or false by placing a check mark in the appropriate column. True False 1. Amounts entered on the left side of an account, regardless of the account title, are called credits or charges to the account.... 2. The difference between the total debits and the total credits posted to an account yields a figure called the balance of the account.... 3. A credit balance in the supplies account could result only from an error.... 4. The income statement accounts are listed first in the chart of accounts followed by the balance sheet accounts.... 5. The residual claim against the assets of a business after the total liabilities are deducted is called stockholders equity.... 6. Every business transaction affects a minimum of one account.... 7. The process of recording a transaction in a journal is called posting... 8. A group of accounts for a business entity is called a journal.... 9. A listing of the accounts in a ledger is called a chart of accounts.... 10. A recording error caused by the erroneous rearrangement of digits, such as writing $627 as $672, is called a slide...
24 Chapter 2 EXERCISE 2-1 Eight transactions are recorded in the following T accounts: Cash Machinery Dividends (1) 20,000 (5) 2,500 (2) 6,300 (8) 3,500 (7) 2,000 (8) 3,500 Accounts Receivable Accounts Payable Service Revenue (4) 5,000 (7) 2,000 (5) 2,500 (2) 6,300 (4) 5,000 (3) 820 (6) 1,600 Supplies Capital Stock Operating Expenses (3) 820 (1) 20,000 (6) 1,600 Instructions: For each debit and each credit, indicate in the following form the type of account affected (asset, liability, stockholders equity, revenue, or expense) and whether the account was increased (+) or decreased ( ). Account Debited Account Credited Transaction Type Effect Type Effect (1) (2) (3) (4) (5) (6) (7) (8)
Name: Chapter 2 25 PROBLEM 2-1 During June of the current year, Joan Star started Star Service Company. Instructions: (1) Record the following transactions in the two-column journal given below. June 1. Invested $5,000 in cash, equipment valued at $14,500, and a van worth $21,000 in exchange for capital stock. 16. Purchased additional equipment on account, $5,500. 28. Purchased supplies on account, $500. 30. Paid $2,100 to creditors on account. (2) Post to the appropriate ledger accounts on the following pages. (3) Prepare a trial balance of the ledger accounts of Star Service Company as of June 30 of the current year, using the form that follows the ledger accounts. (1) JOURNAL PAGE DATE DESCRIPTION POST. REF. 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23
26 Chapter 2 (2) LEDGER ACCOUNTS ACCOUNT Cash ACCOUNT NO. 11 DATE ITEM POST. REF. BALANCE ACCOUNT Supplies ACCOUNT NO. 12 DATE ITEM POST. REF. BALANCE ACCOUNT Equipment ACCOUNT NO. 18 DATE ITEM POST. REF. BALANCE ACCOUNT Vehicles ACCOUNT NO. 19 DATE ITEM POST. REF. BALANCE ACCOUNT Accounts Payable ACCOUNT NO. 21 DATE ITEM POST. REF. BALANCE
Name: Chapter 2 27 ACCOUNT Capital Stock ACCOUNT NO. 31 DATE ITEM POST. REF. BALANCE (3)
28 Chapter 2 PROBLEM 2-2 On January 2, 20--, Judy Turner, an attorney, opened a law office Judy Turner, Attorney at Law, P.C. The following transactions were completed during the month. a. Invested $20,000 cash and $13,200 worth of office equipment in the business in exchange for capital stock. b. Paid a month s rent of $2,500. c. Paid $1,000 for office supplies. d. Collected legal fees of $19,600. e. Paid secretary a salary of $1,100. f. Purchased $200 worth of office supplies on account. g. Bought an auto for business use. It cost $13,000. Turner paid $2,600 down and charged the balance. h. Paid dividends of $5,000. i. Paid $800 for auto repairs and maintenance. j. Received a $240 telephone bill. k. Paid the $240 telephone bill. l. Paid premiums of $1,700 on property insurance. m. Paid $2,000 on accounts payable. n. Paid $5,000 cash for books for the law library. o. Paid $500 cash for janitor service. Instructions: (1) Record the transactions in the T accounts that follow. (2) Prepare a trial balance, using the form on the following page. Cash Office Supplies Office Equipment Prepaid Insurance Auto Library Accounts Payable
Name: Chapter 2 29 Capital Stock Rent Expense Auto Repairs & Maintenance Expense Dividends Salary Expense Janitor Expense Legal Fees Telephone Expense (2)
30 Chapter 2 PROBLEM 2-3 The following errors were made in journalizing and posting transactions: a. A $1,000 premium paid for insurance was debited to Prepaid Rent and credited to Cash. b. A $200 purchase of supplies on account was recorded as a debit to Supplies and a credit to Accounts Receivable. c. Dividends of $1,500 were debited to Cash and credited to the dividends account. Instructions: Prepare entries in the two-column journal provided below to correct these errors. JOURNAL PAGE DATE DESCRIPTION POST. REF. 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25
Name: Chapter 2 31