Ch02 Harrison 8e GE SM

Chapter 2
Transaction Analysis
Short Exercises
(5 min.) S 2-1
Horton’s payment was not an expense.
Horton acquired an asset, Equipment, because the computer

is an economic resource that could produce future benefit to
the business.
(5 min.) S 2-2
a. $14,800 ($13,000 + $1,800 + $4,000 − $4,000)
b. $ 1,800
64 Financial Accounting 8/e Solutions Manual

(5-10 min.) S 2-3
Cash
31,000 3,000
2,000
Bal. 30,000
(5 min.) S 2-4
Increased total assets: August 1 (Cash)
August 1 (Medical supplies)
August 3 (Cash, Accounts Receivable)
(5-10 min.) S 2-5

a. Purchase of asset for cash
Sale of asset for cash
Collection of an account receivable
b. Payment of dividends to owners
Expense transaction
c. Pay a liability
d. Issuance of shares
Revenue transaction
e. Purchase of asset on account
Borrow money
(Answers may vary.)
Chapter 2 Transaction 65
Analysis
(10 min.) S 2-6
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Jul. 15 Cash…………………………………… 34,000

Note Payable……………………… 34,000
Borrowed money from the bank.
22 Accounts Receivable………………. 8,500

Service Revenue…………………. 8,500
Performed service on account.
28 Cash…………………………………… 6,500
Accounts Receivable……………. 6,500
Received cash on account.
29 Utilities Expense……………………. 700

Accounts Payable……………….. 700
Received utility bill.
31 Salary Expense……………………… 3,100

Cash………………………………… 3,100
Paid salary expense.

(10-15 min.) S 2-7
Req. 1
Journal
Supplies……………………………….. 2,000
Accounts Payable………………… 2,000
Purchased supplies on account.
Accounts Payable…………………… 500

Cash………………………………… 500
Paid cash on account.
Req. 2
Accounts Payable
500 2,000
Bal. 1,500
Req. 3
The business owes $1,500, as shown in the Accounts Payable

account.
Analysis
(10-15 min.) S 2-8
Req. 1
Journal
Accounts Receivable……………….. 5,200

Service Revenue………………….. 5,200
Cash……………………………………. 2,400
Accounts Receivable…………….. 2,400
Req. 2
Cash Accounts Receivable Service Revenue

2,400 5,200 2,400 5,200
Bal. 2,400 Bal. 2,800 Bal. 5,200

(10 min.) S 2-9
Old Boardwalk
Trial Balance
As at December 31, 2010
ACCOUNT DEBIT CREDIT
Millions
Cash……………………….…... $ 6
Other assets………………….. 13
Accounts payable…………… $ 1
Other liabilities………………. 5
Shareholders’ equity……….. 3
Revenues……………………... 37
Expenses……………………... 27 ___
Total……………………….…… $46 $46
Old Boardwalk’s net income: $10 million ($37 − $27)
(10 min.) S 2-10

1. Total assets = $100,500 ($7,500 + $12,000 + $5,000 +
$24,000 + $52,000)
2. Total liabilities = $53,000 ($21,000 + $32,000)
3. Net income = $31,500 ($63,000 − $23,000 − $7,500 −
$1,000)
Analysis
(10 min.) S 2-11
1. Total debits = $ 85,200 ($132,000 + $5,200 − $52,000)
Total credits = $132,000
Difference = $ 45,000 ($132,000 − $85,200)
$46,800 / 9 = $5,200 (an integer), which
suggests either a transposition or a slide.
2. Total debits = $141,000 ($132,000 + $21,000 − $12,000)

Total credits = $132,000
Difference = $ 9,000 ($141,000 − $132,000)
$9,000 / 9 = $1,000 (an integer), which
suggests either a transposition or a slide.
3. Total debits = $120,000 ($132,000 − $12,000)

Total credits = $144,000 ($132,000 + $12,000)
Difference = $ 24,000 ($144,000 − $120,000)
$24,000 / 2 = $12,000 (original amount of
accounts receivable).

(10 min.) S 2-12
H 1. Debit A. The cost of operating a
business; decrease in
A 2. Expense shareholders’ equity
C 3. Net income B. Always a liability
D 4. Ledger C. Revenues – Expenses
J 5. Posting D. Grouping of accounts
I 6. Normal balance E. Assets – Liabilities
B 7. Payable F. Record of transactions
F 8. Journal G. Always an asset
G 9. Receivable H. Left side of an account
E 10. Owners’ equity I. Side of an account where

increases are recorded
J. Copying data from the

journal to the ledger
Analysis
(5 min.) S 2-13
Cash Computer Equipment
140,000 100,000
Accounts Payable Share Capital

100,000 140,000
Total debits = $240,000 ($140,000 + $100,000)
Total credits = $240,000 ($100,000 + $140,000)

Exercises
Group A
(10-15 min.) E 2-14A

TO: Home Office
FROM: Store Manager
During the first week, I used the store’s beginning cash to

purchase equipment and supplies. I signed a note payable to
buy land and a building. After all these transactions, the
store’s balance sheet appears as follows:
M. Crew
Dallas Store
Balance Sheet
Date
ASSETS LIABILITIES
Cash $ 26,000* Note payable
Supplies 8,000 ($88,000 + $123,000) $211,000
Equipment 60,000
Land 88,000 SHAREHOLDERS’ EQUITY
Building 123,000 Share capital 94,000
Total liabilities and ________
Total assets $305,000 shareholders’ equity $305,000
_____
*94,000 – 8,000 – 60,000 = 26,000
Cash
94,000 60,000
8,000
26,000
Analysis
(10-15 min.) E 2-15A
a. No effect on total assets. Increase in cash offsets the
decrease in accounts receivable.
b. No effect (a personal transaction)
c. No effect on total assets. Increase in cash offsets the
decrease in land.
d. Increased assets (cash)
e. No effect on total assets. Increase in land offsets the
decrease in cash.
f. Increased assets (cash)
g. Decreased assets (cash)
h. Increased assets (equipment)
i. Increased assets (merchandise inventory)
j. Decreased assets (cash)

(10-20 min.) E 2-16A
Req. 1
Analysis of Transactions
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Accounts Medical Accounts Note Share Retained Type of Shareholders’
Date Cash + Receivable + Supplies + Land = Payable + Payable + Capital + Earnings Equity Transaction
Mar. 6 42,000 42,000 Issued shares
9 (25,000) 25,000
12 16,000 16,000
15 Not a transaction of the business.
15-31 3,850 3,850 7,700 Service revenue
15-31 (900) (900) Salary expense
(900) (900) Rent expense
(200) (200) Utilities expense
31 200 (200)
31 18,000 18,000
31 (1,100) (1,100)
Bal. 35,950 3,850 15,800 25,000 14,900 18,000 42,000 5,700
80,600 80,600
Chapter 2 Transaction Analysis 75

(continued) E 2-16A
Req. 2
a. $80,600
b. $3,850
c. $32,900 ($14,900 + $18,000)
d. $47,700 ($80,600 − $32,900, or $42,000 + $5,700)
e. $5,700 (Revenue, $7,700 minus total expenses of $2,000,

equals net income, $5,700.)

(10-15 min.) E 2-17A
Journal
Mar. 6 Cash……………………………………….. 42,000

Share Capital………………………. 42,000
Issued shares to owner.
9 Land………………………………………... 25,000
Cash……………………………………. 25,000
Paid cash for land.
12 Medical Supplies………………………… 16,000

Accounts Payable…………………… 16,000
15 Not a business transaction.
15-31 Cash……………………………………….. 3,850

Accounts Receivable…………………… 3,850
Service Revenue……………………... 7,700
Performed service for cash and on account.
15-31 Salary Expense………………………….. 900

Rent Expense…………………………….. 900
Utilities Expense………………………… 200
Cash……………………………………. 2,000
Paid cash expenses.
31 Cash……………………………………….. 200
Medical Supplies…………………….. 200
Sold medical supplies.
31 Cash……………………………………….. 18,000
Note Payable………………………….. 18,000
Borrowed money.
31 Accounts Payable………………………. 1,100

Cash……………………………………. 1,100
Paid on account.
Analysis
(10-20 min.) E 2-18A
Journal
Apr. 1 Cash…………………………………………… 19,100

Share Capital…………………………….. 19,100
Issued ordinary shares to owner.
2 Office Supplies……………………………… 300

Accounts Payable……………………….. 300
Purchased office supplies on account.
4 Land…………………………………………… 14,700
Cash……………………………………….. 14,700
Paid cash for land.
6 Cash…………………………………………… 2,700
Service Revenue………………………… 2,700
Performed services for cash.
9 Accounts Payable…………………………... 200

Cash……………………………………….. 200
17 Accounts Receivable………………………. 1,000

23 Cash…………………………………………… 200
Accounts Receivable…………………… 200
30 Salary Expense……………………………… 1,300

Rent Expense………………………………... 500
Cash……………………………………….. 1,800
Paid cash expenses.

(20-30 min.) E 2-19A
Req. 1
Cash Accounts Receivable

Apr. 1 19,100 Apr. 4 14,700 Apr. 17 1,000 Apr. 23 200
6 2,700 9 200 Bal. 800
23 200 30 1,800
Bal. 5,300
Office Supplies Land

Apr. 2 300 Apr. 4 14,700
Bal. 300 Bal. 14,700

Apr. 9 200 Apr. 2 300 Apr. 1 19,100
Bal. 100 Bal. 19,100
Service Revenue Salary Expense

Apr. 6 2,700 Apr. 30 1,300
17 1,000 Bal. 1,300
Bal. 3,700
Rent Expense
Apr. 30 500
Bal. 500
Analysis
(continued) E 2-19A
Req. 2
Harris Tree Cellular, Inc.

Trial Balance
As at April 30, 2010
Cash…………………………... $ 5,300
Accounts receivable……….. 800
Office supplies……………… 300
Land…………………………... 14,700
Accounts payable………….. $ 100
Share capital………………… 19,100
Service revenue…………….. 3,700
Salary expense……………… 1,300
Rent expense………………... 500
Total…………………………... $22,900 $22,900
Req. 3
Total assets ($5,300 + $800 + 300 + $14,700)…….. $21,100

Total liabilities…………………………………………. (100)
Total shareholders’ equity ($19,100 + $1,900)………21,000

(10-15 min.) E 2-20A
Journal
1. Cash………………………………….. 10,200
Share capital…………………….. 10,200
Issued shares.
2. Cash………………………………….. 6,900
Note Payable…………………….. 6,900
Borrowed money by signing a note
payable.
3. Land………………………………….. 30,000
Cash……………………………….. 6,000
Note Payable…………………….. 24,000
Purchased land by paying cash
and signing a note payable.
4. Supplies……………………………… 500
Accounts Payable………………. 500
5. Cash………………………………….. 150
Supplies…………………………... 150
Sold supplies for cash.
6. Equipment…………………………… 5,100
Cash……………………………….. 5,100
Paid cash for equipment.
7. Accounts Payable………………….. 100

Cash……………………………….. 100
Cash balance = $6,050 ($10,200 + $6,900 − $6,000 + $150 − $5,100 − $100)

Company owes $31,300 ($6,900 + $24,000 + $500 − $100)
Analysis
(10-20 min.) E 2-21A
Req. 1
Deluxe Pool Service, Inc.

Trial Balance
As at June 30, 2010
Cash…………………………... $ 8,500
Accounts receivable……….. 15,900
Land…………………………... 29,800
Accounts payable………….. $ 4,400
Note payable………………… 10,500
Retained earnings………….. 25,600
Dividends…………………….. 6,100
Utilities expense……………. 2,100
Delivery expense…………… 700
Total…………………………... $71,300 $71,300

(continued) E 2-21A
Req. 2
Deluxe Pool Service, Inc.

Income Statement
Month Ended June 30, 2010
Service revenue………………... $22,400
Salary expense………………… $8,200
Utilities expense……………….. 2,100
Delivery expense………………. 700
Total expenses…………………. 11,000
Net income……………………… $11,400
Analysis
(15-25 min.) E 2-22A
Carver, Inc.
Trial Balance
As at September 30, 2010
Cash…………………………... $ 4,900*
Accounts receivable……….. 12,700*
Inventory……………………... 16,600
Supplies……………………… 200
Land…………………………... 52,000
Accounts payable………….. $15,100*
Share capital………………… 48,000*
Sales revenue……………….. 30,500
Insurance expense…………. 3,000*
Rent expense………………... 1,100
Utilities expense……………. 1,400* _______
Total…………………………... $93,600 $93,600
_____
*Explanations:
Cash: $4,500 + $400 = $4,900
Accounts Receivable: $13,100 − $400 = $12,700
Accounts Payable: $11,900 + $3,000 − $300 + $500 = $15,100
Share capital: $47,500 + $500 = $48,000
Insurance Expense: $0 + $3,000 = $3,000
Utilities Expense: $900 + $500 = 1,400

(5-15 min.) E 2-23A
(a) 12,000 (b) 1,000 (f) 8,100
(d) 2,000 Bal. 8,100
(e) 300
(g) 2,900
Bal. 5,800
Office Supplies Office Furniture

(c) 700 (a) 8,600
Bal. 700 Bal. 8,600

(e) 300 (c) 700 (a) 20,600
Bal. 400 Bal. 20,600
Dividends Service Revenue

(g) 2,900 (f) 8,100
Bal. 2,900 Bal. 8,100
Salary Expense Rent Expense

(d) 2,000 (b) 1,000
Bal. 2,000 Bal. 1,000
Analysis
(10-20 min.) E 2-24A
Req. 1
Linda Oxford, Attorney

Trial Balance
As at May 31, 2010
Cash…………………………... $ 5,800
Office furniture……………… 8,600
Dividends…………………….. 2,900
Rent expense……………….. 1,000
Total…………………………... $29,100 $29,100
Req. 2
The business performed well during May. The result of

operations was net income of $5,100, as shown by the income
statement accounts:
Service revenue…………………. $ 8,100

Salary expense……….. $2,000
Rent expense…………. 1,000
Total expenses……………….. (3,000)
Net income……………………….. $ 5,100

Exercises
Group B
(10-15 min.) E 2-25B
TO: Home Office
FROM: Store Manager
During the first week, I used the store’s beginning cash to

purchase equipment and supplies. I signed a note payable to
buy land and a building. After all these transactions, the
store’s balance sheet appears as follows:
T. Crew
San Diego Store
Balance Sheet
Date
ASSETS LIABILITIES
Cash $ 15,000* Note payable
Supplies 13,000 ($91,000 + $120,000) $211,000
Equipment 62,000
Land 91,000 SHAREHOLDERS’ EQUITY
Building 120,000 Share capital 90,000
Total liabilities and ________
Total assets $301,000 shareholders’ equity $301,000
_____
*90,000 – 13,000 – 62,000 = 15,000
Cash
90,000 62,000
13,000
15,000
Analysis
(10-15 min.) E 2-26B
a. Increased assets (cash)

b. No effect on total assets. Increase in equipment offsets the
decrease in cash.
c. Decreased assets (cash)
d. No effect (a personal transaction)
e. Increased assets (land)
f. Increased assets (cash)
g. No effect on total assets. Increase in notes receivable
offsets the decrease in land.
h. Increased assets (accounts receivable)
i. Increased assets (supplies)
j. Decreased assets (cash)

(10-20 min.) E 2-27B
Req. 1
Accounts Medical Accounts Note Share Retained Type of Shareholders’
Date Cash + Receivable + Supplies + Land = Payable + Payable + Capital + Earnings Equity Transaction
Mar. 6 44,000 44,000 Issued shares
9 (31,000) 31,000
12 1,700 1,700
15-31 3,800 3,800 7,600 Service revenue
15-31 (800) (800) Salary expense
(800) (800) Rent expense
(300) (300) Utilities expense
31 400 (400)
31 16,000 16,000
31 (700) (700)
Bal. 30,600 3,800 1,300 31,000 1,000 16,000 44,000 5,700
66,700 66,700

(continued) E2-27B
Req. 2
a. $66,700
b. $3,800
c. $17,000 ($1,000 + $16,000)
d. $49,700 ($66,700 − $17,000, or $44,000 + $5,700)
e. $5,700 (Revenue, $7,600 minus total expenses of $1,900,

equals net income, $5,700.)

(10-15 min.) E 2-28B
Journal
Mar. 6 Cash……………………………………….. 44,000

Share capital….………………………. 44,000
9 Land………………………………………... 31,000
Cash……………………………………. 31,000
Purchased land.
12 Medical Supplies………………………… 1,700

Accounts Payable…………………… 1,700
15-31 Cash……………………………………….. 3,800

Accounts Receivable…………………… 3,800
Service Revenue……………………... 7,600
Performed service for cash and on account.
15-31 Salary Expense………………………….. 800

Rent Expense…………………………….. 800
Utilities Expense………………………… 300
Cash……………………………………. 1,900
Paid expenses.
31 Cash……………………………………….. 400
Medical Supplies…………………….. 400
Sold medical supplies.
31 Cash……………………………………….. 16,000
Note Payable………………………….. 16,000
Borrowed money.
31 Accounts Payable………………………. 700

Cash……………………………………. 700
Paid on account.
Analysis
(10-20 min.) E 2-29B
Journal
Apr. 1 Cash…………………………………………… 19,600

Share capital……………………………... 19,600
Issued ordinary shares.
2 Office Supplies……………………………… 900

Accounts Payable……………………….. 900
Purchased office supplies on account.
4 Land…………………………………………… 14,600
Cash……………………………………….. 14,600
Paid cash for land.
6 Cash…………………………………………… 2,500
Performed services for cash.
9 Accounts Payable…………………………... 200

Cash……………………………………….. 200
17 Accounts Receivable………………………. 1,200

23 Cash…………………………………………… 900
Accounts Receivable…………………… 900
30 Salary Expense……………………………… 1,900

Rent Expense………………………………... 1,400
Cash……………………………………….. 3,300
Paid cash expenses.

(20-30 min.) E 2-30B
Req. 1

Apr. 1 19,600 Apr. 4 14,600 Apr. 17 1,200 Apr. 23 900
6 2,500 9 200 Bal. 300
23 900 30 3,300
Bal. 4,900
Office Supplies Land

Apr. 2 900 Apr. 4 14,600
Bal. 900 Bal. 14,600

Apr. 9 200 Apr. 2 900 Apr. 1 19,600
Bal. 700 Bal. 19,600

Apr. 6 2,500 Apr. 30 1,900
17 1,200 Bal. 1,900
Bal. 3,700
Rent Expense
Apr. 30 1,400
Bal. 1,400
Analysis
(continued) E 2-30B
Req. 2
Green Tree Cellular, Inc.

Trial Balance
As at April 30, 2010
Cash…………………………... $ 4,900
Land…………………………... 14,600
Total…………………………... $24,000 $24,000
Req. 3
Total assets ($4,900 + $300 + 900 + $14,600)…….. $20,700

Total liabilities…………………………………………. (700)
Total shareholders’ equity ($19,600 + $400)……… $20,000

(10-15 min.) E 2-31B
Journal
1. Cash………………………………….. 9,700
Share capital…………………….. 9,700
Issued ordinary shares.
2. Cash………………………………….. 6,700
Note Payable…………………….. 6,700
Borrowed money; signed note payable.
3. Land………………………………….. 30,000
Cash……………………………….. 5,000
Note Payable…………………….. 25000
Purchased land by paying cash
and signing a note payable.
4. Supplies……………………………… 500
Accounts Payable………………. 500
5. Cash………………………………….. 80
Supplies…………………………... 80
Sold supplies for cash.
6. Equipment…………………………… 6,000
Cash……………………………….. 6,000
Paid cash for equipment.
7. Accounts Payable………………….. 90
Cash……………………………….. 90
Cash balance = $5,390 ($9,700 + $6,700 − $5,000 + $80 − $6,000 − $90)

Company owes $32,100 ($6,700 + $25,000 + $500 − $90)
Analysis
(10-20 min.) E 2-32B
Req. 1
Grand Pool Service, Inc.

Trial Balance
As at June 30, 2010
Cash…………………………... 9,400
Land…………………………... 29,400
Dividends…………………….. 6,300
Utilities expense……………. 1,600
Delivery expense…………… 200
Total…………………………... $70,400 $70,400
Req. 2
Grand Pool Service, Inc.

Income Statement
Month Ended June 30, 2010
Service revenue………………... $22,800
Salary expense………………… $8,200
Utilities expense……………….. 1,600
Delivery expense………………. 200
Total expenses…………………. (10,000)
Net income……………………… $12,800

(15-25 min.) E 2-33B
Farris, Inc.
Trial Balance
As at June 30, 2010
Cash…………………………... $ 4,300*
Accounts receivable……….. 13,100*
Inventory……………………... 16,500
Supplies……………………… 700
Land…………………………... 53,000
Accounts payable………….. $14,500*
Share capital………………… 47,900*
Sales revenue………………. 31,900
Insurance expense…………. 3,300*
Rent expense………………... 600
Utilities expense……………. 600* _______
Total…………………………... $94,300 $94,300
_____
*Explanations:
Cash: $4,100 + $200 = $4,300
Accounts Receivable: $13,300 − $200 = $13,100
Accounts Payable: $12,400 + $2,000 − $200 + $300 = $14,500
Share Capital: $47,800 + $100 = $47,900
Insurance Expense: $0 + $3,300 = $3,300
Utilities Expense: $300 + $300 = 600
Analysis
(5-15 min.) E 2-34B
(a) 11,000 (b) 1,200 (f) 8,300
(d) 2,200 Bal. 8,300
(e) 300
(g) 2,100
Bal. 5,200
Office Supplies Office Furniture

(c) 700 (a) 9,100
Bal. 700 Bal. 9,100

(e) 300 (c) 700 (a) 20,100
Bal. 400 Bal. 20,100

(g) 2,100 (f) 8,300
Bal. 2,100 Bal. 8,300

(d) 2,200 (b) 1,200
Bal. 2,200 Bal. 1,200

(10-20 min.) E 2-35B
Req. 1
Linda Conway, Attorney

Trial Balance
As at January 31, 2010
Cash…………………………... $ 5,200
Office furniture……………… 9,100
Dividends…………………….. 2,100
Rent expense……………….. 1,200
Total…………………………... $28,800 $28,800
Req. 2
The business performed well during January. The result of

operations was net income of $4,900, as shown by the income
statement accounts:
Service revenue…………………. $ 8,300

Salary expense……….. $2,200
Rent expense…………. 1,200
Total expenses……………….. (3,400)
Net income……………………….. $ 4,900
Analysis
Serial Exercise
(20-30 min.) E 2-36

Reqs. 1 and 3

Mar. 2 7,000 Mar. 2 600 Mar. 18 2,100
9 1,200 3 2,400
12 300
Bal. 4,900
Supplies Equipment
Mar. 5 500 Mar. 3 2,400
Furniture Accounts Payable

Mar. 4 7,500 Mar. 4 7,500
5 500
Bal. 8,000
Share Capital Dividends

Mar. 2 7,000
Service Revenue Rent Expense

Mar. 9 1,200 Mar. 2 600
18 2,100
Bal. 3,300
Utilities Expense
Mar. 12 300

(continued) E 2-36
Req. 2
Journal
Mar. 2 Cash…………………………………….. 7,000

Share Capital……………………….. 7,000
2 Rent Expense…………………………. 600

Cash…………………………………. 600
3 Equipment……………………………... 2,400
Cash…………………………………. 2,400
4 Furniture……………………………….. 7,500
Accounts Payable…………………. 7,500
5 Supplies………………………………... 500
Accounts Payable…………………. 500
9 Cash…………………………………….. 1,200
Service Revenue…………………... 1,200
12 Utilities Expense……………………… 300

Cash…………………………………. 300
18 Accounts Receivable………………… 2,100


Analysis
(continued) E 2-36
Req. 3
Jerome Smith, Certified Public Accountant, P.C.

Trial Balance
As at March 18, 2010
Cash…………………………... $ 4,900
Supplies……………………… 500
Equipment…………………… 2,400
Furniture……………………... 7,500
Dividends…………………….. —
Rent expense……………….. 600
Utilities expense……………. 300
Salary expense……………… —
Total…………………………... $18,300 $18,300

Challenge Exercises
(20-40 min.) E 2-37

a. Total cash paid during October:
Cash
Sept. 30 Bal. 11,000
Oct. receipts 83,000 Oct. payments X = $88,000
Oct. 31 Bal. 6,000
$11,000 + $83,000 − X = $ 6,000

X = $88,000
b. Cash collections from customers during March:
Accounts Receivable
Sept 30 Bal. 28,000
Oct. sales
on account 47,000 Oct. collections X = $49,000
Mar. 31 Bal. 26,000
$28,000 + $47,000 − X = $26,000

X = $49,000
c. Cash paid on notes payable during March:
Notes Payable
Sept. 30 Bal. 15,000
March March
X = 16,000 payments on notes X new borrowing 24,000
Mar. 31 Bal. 23,000
$15,000 + $24,000 − X = $23,000

Analysis
X = $16,000

(20-30 min.) E 2-38
Req. 1
Circle 360, Inc.

Trial Balance
As at October 31, 2010
Cash…………………………... $ 4,400
Land…………………………... 34,000
Advertising expense……….. 1,000 _______
Totals…………………………. $49,400 $49,200
Out of balance
by $200
The correct balance of Accounts Receivable is $6,600($6,800 −

$200). After this correction, total debits will be $47,200
($49,400 − $200), the same as total credits.

Analysis
(continued) E 2-38
Req. 2
a. Total assets = $45,000 ($4,400 + $6,600* + $34,000)

b. Total liabilities = $11,700 ($6,300 + $5,400)
c. Net income = $ 4,800 ($9,000 − $3,200 − $1,000)
_____
* $6,800 − $200 = $6,600 (Req. 1)

(10-15 min.) E 2-39
Nashua Co.:
Income statement September October
Medical expense………….. $46,000 $ -0-
Balance sheet Sept. 30 Oct. 31

Cash………………………… $57,000 $23,000*
Accounts payable………… 46,000 12,000**
Ditka Hospital:
Income statement September October
Service revenue………….. $46,000 $ -0-
Balance sheet Sept. 30 Oct 31

Cash………………………… $ -0- $34,000
Accounts receivable…….. 46,000 12,000**
Explanation:
Nashua’s expense is Ditka’s revenue.
Nashua’s cash payment is Ditka’s cash receipt.
Nashua’s account payable is Ditka’s account receivable.
__________
*$57,000 − $34,000 = $23,000
**$46,000 − $34,000 = $12,000

Analysis
Quiz
Q2-40 d
Q2-41 d
Q2-42 d
Q2-43 d
Q2-44 c
Q2-45 a
Q2-46 d
Q2-47 d
Q2-48 c
Q2-49 a
Q2-50 d
Q2-51 d
Q2-52 b
Q2-53 a
Q2-54 b
Q2-55 c
Q2-56 d
Q2-57 a
Q2-58 a
Q2-59 c ($54,000 + $27,000 + $15,000) = $96,000

Problems
Group A
(15-30 min.) P 2-60A

Dear Rhonda,
This trial balance lists the accounts of the company, along

with their balances at December 31, 2010. The trial balance
provides the data for computing total assets, total liabilities,
and net income or net loss.
Amusement Specialties
a. Total assets = $408,000 ($11,000 + $48,000 + $5,000 +
$239,000 + $105,000)
b. Total liabilities = $198,000 ($108,000 + $90,000)
c. Net income = $156,000 ($257,000 − $28,000 − $4,000 -
− $61,000 − $8,000)
Student responses may vary.

Analysis
(45-60 min.) P 2-61A
Req. 1
Accounts Accounts Share Retained Type of Shareholders’
Cash + Receivable + Supplies + Land = Payable + Capital + Earnings Equity Transaction
Bal. 1,150 1,350 11,900 7,600 4,400 2,400
a) 9,200 9,200 Issued shares
b) 6,700 6,700 Service revenue
c) (4,500) (4,500)
d) 600 600
e) 700 (700)
f) 2,900 2,900 Service revenue
g) (1,100) (1,100) Rent expense
(1,000) (1,000) Advertising expense
h) (1,500) ____ ____ (1,500) Dividends
Bal. 9,650 3,550 600 11,900 3,700 13,600 8,400
$25,700 $25,700

(continued) P 2-61A
Req. 2
Mason Resources, Inc.

Income Statement
Month Ended May 31, 2010
Revenues:
Service revenue ($6,700 + $2,900)... $9,600
Expenses:
Rent expense………………………… $1,100
Advertising expense………………... 1,000
Total expenses………………………. (2,100)
Net income………………………………. $7,500
Req. 3

Statement of Changes in Equity
Total Equity, May 1, 2010……......................... $ 6,800
Add: Share Issued…………………………….. 9,200
Add: Net income……………………………….. 7,500
23,500
Less: Dividends…………………………………. (1,500)
Total Equity, May 31, 2010………..…………….. $ 22,000

Analysis
(continued) P 2-61A
Req. 4

Balance Sheet
As at May 31, 2010
ASSETS LIABILITIES
Cash………………………. $9,650 Accounts payable………… $ 3,700
Accounts receivable…… 3,550 SHAREHOLDERS’
Supplies………………….. 600 EQUITY
Land………………………. 11,900 Share capital………………. 13,600
Retained earnings………… 8,400
Total shareholders’ equity. 22,000
Total liabilities and
Total assets……………… $25,700 shareholders' equity…. $25,700

(30-40 min.) P 2-62A
Req. 1
Journal
ACCOUNT TITLES DEBIT CREDIT
a. Cash……………………………………. 9,200
Share Capital...……………………. 9,200
b. Cash……………………………………. 6,700
c. Accounts Payable…………………… 4,500

Cash………………………………… 4,500
d. Supplies……………………………….. 600
Accounts Payable………………… 600
e. Cash……………………………………. 700
Accounts Receivable…………….. 700
f. Accounts Receivable……………….. 2,900

g. Rent Expense………………………… 1,100

Advertising Expense………………... 1,000
Cash………………………………… 2,100
h. Dividends……………………………... 1,500
Cash………………………………… 1,500

Analysis
(continued) P 2-62A
Reqs. 2 and 3
Accounts
Cash Receivable Supplies Land
1,150 4,500 1,350 700 600 11,900
9,200 2,100 2,900
6,700 1,500 3,550
700
9,650
Accounts Share Retained

Payable Capital Earnings Dividends
4,500 7,600 4,400 2,400 1,500
600 9,200
3,700 13,600
Service Advertising
Revenue Rent Expense Expense
6,700 1,100 1,000
2,900
9,600
The balances of all the accounts Cash through Share Capital

agree with the ending balances obtained in Problem 2-61A.

(40-50 min.) P 2-63A
Req. 1
Classification of Transactions
Nov. 4 b
5 c
6 c
7 c
10 b
11 b
12 a
18 c
21 c
25 c
30 c

Analysis
(continued) P 2-63A
Req. 2
Accounts Office Accounts Share Retained Type of Shareholders’
Date Cash + Receivable+ Supplies + Equipment = Payable + Capital + Earnings Equity Transaction
Nov. 4*
5 57,000 57,000 Issued shares
6 (600) 600
7 (12,000) 20,000 8,000
10*
11*
12*
18 3,500 3,500 Service revenue
21 (4,000) (4,000)
25 (1,300) (1,300) Rent expense
30 (1,900) ___ (1,900) Dividends
Bal. 37,200 3,500 600 20,000 4,000 57,000 300
$61,300 $61,300
_____
*Not a transaction of the business.

(continued) P 2-63A
Req. 3
Journal
Nov. 5 Cash…………………………………….. 57,000

Share Capital……………………….. 57,000
6 Supplies………………………………... 600
Cash…………………………………. 600
Purchased supplies.
7 Office Equipment…………………….. 20,000

Cash…………………………………. 12,000
Purchased equipment.

21 Accounts Payable……………………. 4,000

Cash…………………………………. 4,000
Paid on account.
25 Rent Expense…………………………. 1,300

Cash…………………………………. 1,300
Paid rent.
30 Dividends………………………………. 1,900
Cash…………………………………. 1,900
Paid dividend.

Analysis
(15-20 min.) P 2-64A
Req. 1
Journal
DATE ACCOUNT TITLES DEBIT CREDIT
Dec. 1 Cash…………………………………….. 26,000
Share capital……………………….. 26,000
5 Rent Expense…………………………. 1,100

Cash………………………………….. 1,100
9 Land…………………………………….. 38,500
Cash………………………………….. 8,500
Notes Payable…………………….... 30,000
10 Supplies………………………………… 1,700
19 Accounts Payable……………………. 600

Cash………………………………….. 600
22 Cash…………………………………….. 20,000
Notes Payable…………………….... 20,000
31 Cash…………………………………….. 12,000
Accounts Receivable………………... 8,000
Service Revenue…………………… 20,000
31 Salary Expense……………………….. 2,400

Advertising Expense………………… 1,500
Utilities Expense…………………….... 1,400
Cash………………………………….. 5,300
31 Dividends………………………………. 6,500
Cash………………………………….. 6,500

Analysis
(continued) P 2-64A
Req. 2
Cash
26,000 1,100
20,000 8,500
12,000 600
5,300
6,500
36,000
Accounts Payable
600 1,700
1,100
Notes Payable
30,000
20,000
50,000
Req. 3
Cash: $36,000
Total amount owed: $51,100 ($1,100 + $50,000)

(50-60 min.) P 2-65A
Req. 1
Journal
Jan. 2 Cash…………………………………… 39,000

Share Capital……………………… 39,000
3 Supplies………………………………. 200
Equipment……………………………. 3,100
Accounts Payable………………... 3,300
4 Cash…………………………………… 1,600
7 Land…………………………………… 27,000
Cash………………………………... 27,000
11 Accounts Receivable……………….. 900

Service Revenue…………………. 900
16 Accounts Payable…………………… 3,100

Cash………………………………… 3,100
17 Utilities Expense…………………….. 170

Cash………………………………… 170
18 Cash…………………………………… 450
Accounts Receivable……………. 450

Analysis
(continued) P 2-65A
Req. 1
Journal
Jan. 22 Utilities Expense…………………… 190

Cash……………………………….. 190
29 Cash………………………………….. 1,400
Service Revenue………………… 1,400
31 Salary Expense…………………….. 2,400

Cash……………………………….. 2,400
31 Dividends……………………………. 3,000
Cash……………………………….. 3,000

(continued) P 2-65A
Req. 2

Jan. 2 39,000 Jan. 7 27,000 Jan. 11 900 Jan. 18 450
4 1,600 16 3,100 Bal. 450
18 450 17 170
29 1,400 22 190
31 2,400 Supplies
31 3,000 Jan. 3 200
Bal. 6,590 Bal. 200
Equipment Land
Jan. 3 3,100 Jan. 7 27,000
Bal. 3,100 Bal. 27,000

Jan. 16 3,100 Jan. 3 3,300 Jan. 2 39,000
Bal. 200 Bal. 39,000
Dividends
Jan. 31 3,000
3,000

Jan. 4 1,600 Jan. 31 2,400
11 900 Bal. 2,400
29 1,400
Bal. 3,900
Utilities Expense
Jan. 17 170
22 190
Bal. 360

Analysis
(continued) P 2-65A
Req. 3
Simmons Heating and Air Conditioning, Inc.

Trial Balance
Cash…………………………... $ 6,590
Supplies……………………… 200
Equipment…………………… 3,100
Land…………………………... 27,000
Dividends…………………….. 3,000
Total…………………………... $43,100 $43,100
Req. 4
Total resources (assets) = $37.340 ($6,590 + $450 +

$200 + $3,100 + $27,000)
Amount owed (total liabilities) = $200
Profit (net income) = $1,140 ($3,900 − $2,400 −

$360)

(40-50 min.) P 2-66A
Reqs. 1 and 2

(a) 28,000 (c) 33,000 (g) 3,200 (j) 1,200
(b) 37,300 (e) 2,500 Bal. 2,000
(f) 1,600 (h) 100
(j) 1,200 (k) 1,900
Bal. 30,600
Supplies Music Equipment

(d) 500 (c) 33,000
Bal. 500 Bal. 33,000
Building Accounts Payable

(a) 52,000 (h) 100 (d) 500
Bal. 52,000 (i) 800
Bal. 1,200
Note Payable Share capital

(b) 37,300 (a) 80,000
Bal. 37,300 Bal. 80,000
Service Revenue
(f) 1,600
(g) 3,200
Bal. 4,800

Analysis
(continued) P 2-66A
(e) 2,500 (k) 1,200
Bal. 2,500 Bal. 1,200
Advertising Expense Utilities Expense

(k) 700 (i) 800
Bal. 700 Bal. 800

(continued) P 2-66A
Req. 3
Stein Services Corporation

Trial Balance
As at November 30, 2010
Cash…………………………... $ 30,600
Supplies……………………… 500
Music equipment…............. 33,000
Building………………………. 52,000
Advertising expense……….. 700
Total…………………………... $123,300 $123,300

Analysis
Problems
Group B
(15-30 min.) P 2-67B

Dear Friend,
This trial balance lists the accounts of the company, along

with their balances at December 31, 2010 The trial balance
provides the data to prepare a balance sheet and an income
statement.
Advantage Specialties’ balance-sheet accounts are

Cash Accounts payable
Accounts receivable Note payable
Prepaid expenses Share capital
Equipment Retained earnings
Building
Advantage Specialties’ income-statement accounts

are
Service revenue Supplies expense
Wage expense Advertising expense
Rent expense
During 2010, Advantage Specialties earned net income of

$151,000 [service revenue of $252,000 minus total expenses of
$101,000 ($25,000 + $4,000 + $65,000 + $7,000)].
Student responses may vary.

(45-60 min.) P 2-68B
Req. 1
Accounts Accounts Share Retained Type of Shareholders’
Cash + Receivable + Supplies + Land = Payable + Capital + Earnings Equity Transaction
Bal. 1,450 1,650 11,500 7,800 4,000 2,800
a) 8,600 8,600 Issued shares
b) 6,500 6,500 Service revenue
c) (4,700) (4,700)
d) 600 600
e) 200 (200)
f) 2,700 2,700 Service revenue
g) (900) (900) Rent expense
(800) (800) Advertising expense
i) (2,300) ___ (2,300) Dividends
Bal. 8,050 4,150 600 11,500 3,700 12,600 8,000
$24,300 $24,300

(continued) P 2-68B
Req. 2
Rodriguez Resources, Inc.

Income Statement
Revenues:
Service revenue ($6,500 + $2,700)…. 9,200
Expenses:
Rent expense………………………... $900
Advertising expense……………….. 800
Total expenses……………………… 1,700
Net income……………………………… $7,500
Req. 3

Statement of Changes in Equity
Total equity, May 1, 2010…………………… $6,800
Add: Share capital………………………… $8,600
Add: Net income…………………………… 7,500
22,900
Less: Dividends…………………………….. (2,300)
Retained earnings, May 31, 2010…………. $20,600

(continued) P 2-68B
Req. 4

Balance Sheet
As at May 31, 2010
ASSETS LIABILITIES
Cash……………………. $8,050 Accounts payable…………. $ 3,700
Accounts receivable… 4,150 SHAREHOLDERS’
Supplies…………….…. 600 EQUITY
Land……………………. 11,500 Share capital..…………….. 12,600
Retained earnings……….... 8,000
Total shareholders’ equity. 20,600
Total liabilities and
Total assets…………... $24,300 shareholders' equity…... $24,300

Analysis
(30-40 min.) P 2-69B
Req. 1
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
a. Cash……………………………………. 8,600
Share capital………………………. 8,600
b. Cash…………………………………… 6,500
c. Accounts Payable ………………….. 4,700

Cash………………………………… 4,700
d. Supplies ……………………………… 600

Accounts Payable……………….. 600
e. Cash……………………………………. 200
Accounts Receivable……………. 200
f. Accounts Receivable……………….. 2,700

g. Rent Expense………………………… 900

Advertising Expense……………….. 800
Cash………………………………… 1,700
i. Dividends……………………………... 2,300
Cash………………………………… 2,300

(continued) P 2-69B
Reqs. 2 and 3
Accounts
Cash Receivable Supplies Land
1,450 4,700 1,650 200 600 11,500
8,600 900 2,700
6,500 800 4,150
200 2,300
8,050
Accounts Share Retained

Payable Capital Earnings Dividends
4,700 7,800 4,000 2,800 2,300
600 8,600
3,700 12,600
Service Advertising
Revenue Rent Expense Expense
6,500 900 800
2,700
9,200
The balances of all the accounts Cash through Share Capital

agree with the ending balances obtained in Problem 2-68B.

Analysis
(40-50 min.) P 2-70B
Req. 1
Classification of Transactions
Nov 4 b
5 c
6 c
7 c
10 b
11 b
12 a
18 c
21 c
25 c
30 c

(continued) P 2-70B
Req. 2
Cash Accounts Office Accounts Share Retained Type of Shareholders’
Date + Receivable + Supplies + Equipment= Payable + Capital + Earnings Equity Transaction
Nov. 4*
5 59,000 59,000 Issued shares
6 (500) 500
7 (12,000) 20,500 8,500
10*
11*
12*
18 3,000 3,000 Service revenue
21 (4,250) (4,250)
25 (500) (500) Rent expense
30 (1,700) ___ (1,700) Dividend
Bal. 40,050 3,000 500 20,500 4,250 59,000 800
$64,050 $64,050
_____
*Not a transaction of the business.

(continued) P 2-70B
Req. 3
Journal
Nov. 5 Cash…………………………………….. 59,000

Share capital……………………….. 59,000
Issued shares to owner.
7 Supplies………………………………... 500
Cash…………………………………. 500
Purchased supplies.
9 Office Furniture……………………….. 20,500

Cash…………………………………. 12,000
Purchased furniture.

29 Accounts Payable……………………. 4,250

Cash…………………………………. 4,250
Paid on account.
30 Rent Expense…………………………. 500

Cash…………………………………. 500
Paid rent.
31 Dividends………………………………. 1,700
Cash…………………………………. 1,700
Paid dividend.

(15-20 min.) P 2-71B
Req. 1
Journal
Dec 1 Cash…………………………………….. 28,000

Share capital……………………….. 28,000
5 Rent Expense…………………………. 2,000

Cash………………………………… 2,000
9 Land…………………………………….. 44,500
Cash…………………………………. 11,500
Notes Payable……………………… 33,000
10 Supplies………………………………... 1,700
19 Accounts Payable……………………. 800

Cash…………………………………. 800
22 Cash……………………………………. 18,500
Notes Payable…………………….. 18,500
31 Cash……………………………………. 14,500
Accounts Receivable……………….. 4,500
31 Salary Expense……………………….. 2,100

Advertising Expense………………… 1,000
Cash…………………………………. 3,100
30 Dividends……………………………… 2,000
Cash…………………………………. 2,000

(continued) P 2-71B
Req. 2
Cash
28,000 2,000
18,500 11,500
14,500 800
2,100
1,000
2,000
41,600
Accounts Payable
800 1,700
900
Notes Payable
33,000
18,500
51,500
Req. 3
Cash: $41,600
Total amount owed: $52,400 ($900 + $51,500)

(50-60 min.) P 2-72B
Req. 1
Journal
Jan. 2 Cash……………………………………. 33,000

Share capital………………………. 33,000
3 Supplies……………………………….. 400
Equipment…………………………….. 2,900
Accounts Payable………………… 3.300
4 Cash……………………………………. 1,700
7 Land……………………………………. 22,000
Cash………………………………… 22,000
11 Accounts Receivable……………….. 1,100

16 Accounts Payable…………………… 2,900

Cash………………………………… 2,900
17 Utilities Expense…………………….. 130

Cash………………………………… 1300
18 Cash……………………………………. 550
Accounts Receivable…………….. 550

(continued) P 2-72B
Req. 1
Journal
Jan. 22 Utilities Expense……………………. 150

Cash……………………………….. 150
29 Cash…………………………………… 1,100
31 Salary Expense……………………… 2,300

Cash………………………………... 2,300
31 Dividends…………………………….. 2,900
Cash………………………………... 2,900

(continued) P 2-72B
Req. 2

Jan. 2 33,000 Jan. 7 22,000 Jan. 11 1,100 Jan. 18 550
4 1,700 16 2,900 Bal. 550
18 550 17 130
29 1,100 22 150
31 2,300 Supplies
31 2,900 Sept. 3 400
Bal. 5,970 Bal. 400
Equipment Land
Jan. 3 2,900 Jan. 7 22,000
Bal. 2,900 Bal. 22,000

Jan. 16 2,900 Jan.3 3,300 Jan. 2 33,000
Bal. 400 Bal. 33,000

Jan. 31 2,900 Jan. 4 1,700
Bal. 2,900 11 1,100
29 1,100
Bal. 3,900

(continued) P 2-72B
Req. 2
Salary Expense
Jan. 31 2,300
Bal. 2,300
Utilities Expense
Jan. 17 130
22 150
Bal. 280

(continued) P 2-72B
Req. 3
O’Shea Plumbing, Inc.

Trial Balance
Cash…………………………... $ 5,970
Supplies……………………… 400
Equipment…………………... 2,900
Land…………………………... 22,000
Share capital……………… 33,000
Dividends…………………….. 2,900
Total…………………………... $37,300 $37,300
Req. 4
Total resources (assets) = $31,820 ($5,970 + $550 +

$400 + $2,900 + $22,000)
Amount owed (total liabilities) = $400
Profit (net income) = $1,320 ($3,900 − $2,300 −

$280)

(40-50 min.) P 2-73B
Reqs. 1 and 2

(a) 32,000 (c) 32,000 (g) 2,800 (j) 1,600
(b) 35,800 (e) 2,300 Bal. 1,200
(f) 1,700 (h) 100
(j) 1,600 (k) 2,000
Bal. 34,700
Supplies Music Equipment

(d) 200 (c) 32,000
Bal. 200 Bal. 32,000
Building Accounts Payable

(a) 52,000 (h) 100 (d) 200
Bal. 52,000 (i) 900
Bal. 1,000
Note Payable Share capital

(b) 35,800 (a) 84,000
Bal. 35,800 Bal. 84,000
Service Revenue
(f) 1,700
(g) 2,800
Bal. 4,500

(continued) P 2-73B
Salary Expense Advertising Expense
(e) 2,300 (i) 900
(k) 800
Bal. 2,300 Bal. 1,700
Rent Expense Utilities Expense

(k) 1,200
Bal. 1,200

(continued) P 2-73B
Req. 3
Silver Entertainment Corporation

Trial Balance
As at March 31, 2010
Cash…………………………… $ 34,700
Accounts receivable………... 1,200
Supplies………………………. 200
Music equipment…………..... 32,000
Building……………………….. 52,000
Accounts payable…………… $ 1,000
Note payable…………………. 35,800
Share capital…………………. 84,000
Service revenue……………… 4,500
Salary expense………………. 2,300
Advertising expense………... 1,700
Rent expense………………… 1,200
Utilities expense…………….. _______ _______
Total……………………………. $125,300 $125,300

Decision Cases
(40-50 min.) Decision Case 1
Reqs. 1 and 2

(a) 5,000 (c) 1,300 (g) 7,000 (i) 1,200
(b) 5,000 (d) 1,800 Bal. 5,800
(h) 2,500 (f) 2,000
(i) 1,200 (f) 1,200
(j) 1,000
Bal. 6,400
Supplies Furniture
(c) 1,300 (e) 4,400
Accounts Payable Notes Payable

(j) 1,000 (e) 4,400 (b) 5,000
Bal. 3,400
Share Capital
(a) 5,000

(g) 7,000 (f) 2,000
(h) 2,500
Bal. 9,500
Advertising Expense Rent Expense

(d) 1,800 (f) 1,200

(continued) Decision Case 1
Req. 3
Barlow Networks, Inc.

Trial Balance
Current Date
Cash…………………………... $6,400
Supplies……………………… 1,300
Furniture……………………... 4,400
Notes payable……………….. 5,000
Advertising expense……….. 1,800
Total…………………………... $22,900 $22,900

(continued) Decision Case 1
Req. 4 (net income or loss for first month of operations)
Revenues:
Service revenue…………... $9,500
Expenses:
Salary expense…………… $2,000
Advertising expense…….. 1,800
Rent expense……………… 1,200
Total expenses……………. 5,000
Net income for month………. $4,400
Recommendation: Barlow may want to review his criteria for

keeping the business open. His criterion
for remaining in operation was a net
income of $5,000. His actual result was
close to his goal. Perhaps he was
unrealistic in his expectations. Most
businesses, large and small, incur losses
in their first months of operation. Barlow
Networks actually earned a profit! The
author suggests that Barlow stick it out for
another few months, at least.

(20-30 min.) Decision Case 2
Little Italy, Inc.

Income Statement
Month Ended December 31, 2011
Sales revenue…………………………….. $42,000
Cost of goods sold (expense)…………. 22,000

Rent expense……………………………... 6,000
Advertising expense…………………….. 5,000
Total expenses………………………… 33,000
Net income………………………………… $ 9,000
Little Italy, Inc.

Balance Sheet
As at December 31, 2011
ASSETS LIABILITIES
Cash……………….. $ 12,000 Accounts payable……… $ 8,000
Food inventory…... 5,000 OWNERS’ EQUITY
Furniture…………... 10,000 Share capital……………. 10,000
Retained earnings……... 9,000*
Total owners’ equity... 19,000
Total liabilities
Total assets……. $27,000 and equity…………. $27,000
*Must solve for this amount. It is also the amount of net

income, which is the only change in
retained earnings for the month.
Recommendation: Do not expand this month. The business

falls short of the goals for both net income and total assets.
However, Little Italy, Inc. appears to be profitable, and assets
are building toward Sophia’s goals. Maybe next month.
Ethical Issue 1
1. The ethical issue is whether these alternatives of
financing the business are proper from an economic,
legal, and ethical standpoint.
2. The stakeholders are Scruffy Murphy, the bank, potential
new creditors, and the friend who may become a
shareholder.
Option 1: Cash…………………………. 100,000

Share Capital…………… 100,000
Option 2: Land…………………………. 100,000

Share Capital……….…… 100,000
Share Capital...…………….. 100,000

Land………………………. 100,000
Option 1 is economically sound, perfectly legal, and also

ethical because the sale of the shares is a valid transaction
between the business and a shareholder. The consequences
of this decision are that Murphy obtains additional financing
at a cost (he now shares ownership of the business with his
friend). The friend gives up cash in exchange for an
ownership interest in the business. The bank and future
creditors obtain complete and truthful disclosure of the
manner in which the business has been financed.
Option 2 represents “window dressing” (making the company

look like an entity that it is not). Although it might be legal in
the strictest sense of the word (and it might not), this option
does not faithfully represent economic reality. Thus, it is not
in accordance with the IFRS, which is a substitute for the legal
criterion. This option is also unethical because the receipt of
the land by the business is not a real transaction. The transfer
of the land back to Murphy means that the business never
actually has the land for its use. It violates the rights of the
bank and future creditors to give them information that is
inaccurate and that does not faithfully represent economic
reality.
The best option to take is definitely Option 1. The decision
maker can walk away from this transaction confident that he
or she told the truth.

Ethical Issue 2
Part A.
1. The ethical issue is whether you should question your
grade, which is higher than you expected. Your choices are (a)
discuss the grade with the professor; and (b) do not discuss
the grade with the professor.
2, 3. Stakeholders are you, the professor, the other students in
the class, and the university. The possible consequence to
you of discussing the grade with the professor is that it may
lead to the discovery that the professor made a mistake in
calculating the grade, which may lead to a downward
adjustment. While this could possibly have adverse economic
consequences (i.e., perhaps loss of scholarship if the grade is
substantially lowered), it is unlikely that a letter-grade drop in
one course would have such an impact on grade point
average as to cause loss of a scholarship. There is no legal
consequence to reporting a grade that is too high. The ethical
consequence is generally positive on all concerned, as it
leads to clarification of the true grade.
4. Student opinions will vary on this part.
Part B.
1. The ethical issue in this case is whether you should
question your grade, which is now lower than you expected.
Your choices are (a) discuss the grade with the professor; and
(b) do not discuss the grade with the professor.
2, 3. Like part a, the stakeholders are you, the professor, the
other students in the class, and the university. The possible
consequence to you of discussing the grade with the
professor is that it may lead to the discovery that the
professor made a mistake in calculating the grade, which may
lead to an upward adjustment. This could have positive
economic consequences (i.e., perhaps keeping a scholarship).
Like part a, the ethical consequence of this action is generally
positive on all concerned, as it leads to clarification of the true
grade.
4. Most students would probably respond “take it to the
professor.” But shouldn’t we be just as concerned about
knowing the true grade either way? The author recommends
discussing the grade with the professor one way or the other.
Part C.
Both course grades and financial statements report results
that people use in order to make decisions that can carry both
positive and negative consequences. In both situations, it is
important that the user receive relevant information, and that
the information faithfully represent facts as they actually
occurred.

Focus on Financials: Nokia Corporation
(20-30 min.)
Reqs. 1 and 3
(All amounts in millions)
Accounts Rec.
Cash (Net) Inventories
2,125 (c) 32,994 11,200 2,876
(b) 52,46 (e) 12,827 (a) 50,710 (b) 52,466 (c) 32,994 (d) 33,337
6
(f) 420 (h) 1,081 9,444 2,533
(g) 4 (i) 6,407
1,706
Net Sales
Other Assets (Revenue) Cost of Sales
(i) 6,4 (a) 50,710 (d 33,337
07
Non-operating income
(net) Operating Expenses
(g) 4 (e) 12,827
Income Taxes Expense

(h) 1,081
Other Income (operating)

(f) 420

Req. 2
(Millions)
a. Accounts receivable, net ..………………. 50,710
Net Sales (Revenue)…………………… 50,710
b. Cash………………………………..………... 52,466
Accounts receivable, net……………... 52,466
c. Inventories………………………………….. 32,994
Cash………………………………………. 32,994
d. Cost of Sales……………..………………… 33,337

Inventories……………….……………… 33,337
e. Operating Expenses…………………….… 12,827

Cash………………………………………. 12,827
f. Cash………………………………………….. 420
Other Income (operating)……….. 420
………..
g. Cash……………… 4
Non-operating 4
income………………………………….……
h. Income Tax Expense 1,081

Cash……………………………. 1,081
i. Other assets………………………………... 6,407

Cash…………………………………… 6,407

(continued) Focus on Financials: Nokia Corporation.
Req. 4
All the selected account balances agree with Nokia’s actual

figures on the income statement or the balance sheet.
Req. 5
(Millions)
Net sales ……………………………………… €50,710
Cost of sales………………………………….. 33,337
Gross Profit………………………….. €17,37
3
Operating (expenses)………………………. (12,82
7)
Other income 420
Income from operations………….. 4,96
6
Non-operating income, net………………... 4
Income before income taxes ………….…... 4,97
0
Provision for income taxes………………… (1,08
1)
Equity method investment activity, net…. (9)
Net income 3,889

Req. 6
Net sales increased by 24.2% from 2006 to 2007 but decreased

by 0.7% from 2007 to 2008. Net Income increased by 54.5% but
decreased by 42.4% from 2007 to 2008. The large decrease of
net income from 2007 to 2008 is mainly due to loss of market
share to other competitors such as Apple and RMI.

Group Projects
Student responses will vary.

Ch02 Harrison 8e GE SM

Uploaded by

Copyright:

Available Formats

Ch02 Harrison 8e GE SM

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch02 Harrison 8e GE SM

Uploaded by

Copyright:

Available Formats

Chapter 2

Horton acquired an asset, Equipment, because the computer

64 Financial Accounting 8/e Solutions Manual

(5-10 min.) S 2-5

(Answers may vary.)

Jul. 15 Cash…………………………………… 34,000

22 Accounts Receivable………………. 8,500

29 Utilities Expense……………………. 700

31 Salary Expense……………………… 3,100

66 Financial Accounting 8/e Solutions Manual

Accounts Payable…………………… 500

The business owes $1,500, as shown in the Accounts Payable

Accounts Receivable……………….. 5,200

Cash Accounts Receivable Service Revenue

68 Financial Accounting 8/e Solutions Manual

Old Boardwalk’s net income: $10 million ($37 − $27)

(10 min.) S 2-10

2. Total debits = $141,000 ($132,000 + $21,000 − $12,000)

3. Total debits = $120,000 ($132,000 − $12,000)

70 Financial Accounting 8/e Solutions Manual

C 3. Net income B. Always a liability

D 4. Ledger C. Revenues – Expenses

J 5. Posting D. Grouping of accounts

I 6. Normal balance E. Assets – Liabilities

B 7. Payable F. Record of transactions

F 8. Journal G. Always an asset

G 9. Receivable H. Left side of an account

E 10. Owners’ equity I. Side of an account where

J. Copying data from the

Accounts Payable Share Capital

Total debits = $240,000 ($140,000 + $100,000)

Total credits = $240,000 ($100,000 + $140,000)

72 Financial Accounting 8/e Solutions Manual

(10-15 min.) E 2-14A

FROM: Store Manager

During the first week, I used the store’s beginning cash to

74 Financial Accounting 8/e Solutions Manual

Chapter 2 Transaction Analysis 75

c. $32,900 ($14,900 + $18,000)

d. $47,700 ($80,600 − $32,900, or $42,000 + $5,700)

e. $5,700 (Revenue, $7,700 minus total expenses of $2,000,

76 Financial Accounting 8/e Solutions Manual

Mar. 6 Cash……………………………………….. 42,000

12 Medical Supplies………………………… 16,000

15 Not a business transaction.

15-31 Cash……………………………………….. 3,850

15-31 Salary Expense………………………….. 900

31 Accounts Payable………………………. 1,100

Apr. 1 Cash…………………………………………… 19,100

2 Office Supplies……………………………… 300

9 Accounts Payable…………………………... 200

17 Accounts Receivable………………………. 1,000

30 Salary Expense……………………………… 1,300

78 Financial Accounting 8/e Solutions Manual

Cash Accounts Receivable

Office Supplies Land

Accounts Payable Share Capital

Service Revenue Salary Expense

Harris Tree Cellular, Inc.