Chapter 3

CHAPTER 3
DISCUSSION QUESTIONS
1. The basic objective of the accounting cycle is However, dividends do not enter into the de-
to transform accounting data into financial termination of net income.
statements and other accounting reports.
6. The dividends account is similar to expense
These outputs help individuals make better
accounts in that dividends and expenses re-
economic decisions.
duce equity through the retained earnings ac-
2. The first three steps in the accounting cycle count. Therefore, they have the same debit
include the following: (increase) and credit (decrease) relationships.
Dividends and expenses are different in that
a. Analyze transactions—verify the dates,
dividends are a distribution of earnings; they
amounts, and authenticity of the transac-
do not enter into the determination of net in-
tions and supporting business docu-
come, and therefore, dividends are not re-
ments from which accounting entries are
ported on the statement of comprehensive in-
made.
come. Expenses, on the other hand, are sub-
b. Record the effects of transactions—rec-
tracted from revenues to determine net in-
ord the nature and amounts of business
come; expenses are reported on the state-
exchanges with journal entries, usually in
ment of comprehensive income.
chronological order.
c. Summarize the effects of transactions. 7. Understanding the mechanics of accounting
(1) Post journal entries—classify and helps a businessperson understand the
group similar transactions into com- shorthand debit/credit language that is often
mon accounts. used when talking about a company’s ac-
(2) Determine account balances and counts. In addition, people who understand
prepare a trial balance—list the bal- the accounting cycle are better able to under-
ances of all accounts to verify that to- stand the flow of information through a busi-
tal debits equal total credits. ness.
3. Each time accounts are debited; other ac- 8. A journal (a book of original entry) provides a
counts have to be credited for the same chronological record of all transactions of an
amount. This is a major characteristic of a entity. It shows the dates of the transactions,
double-entry accounting system. The total the amounts involved, and the accounts af-
debits must always equal the total credits. fected. Usually, an explanation of the trans-
This procedure ensures that assets are al- action is also included.
ways equal to liabilities plus equity.
A ledger is a “book of accounts’’ that lists
4. Asset accounts are increased by debits and each account and all entries made to it. The
decreased by credits. Liability and equity ac- balance of an account can be found by exam-
counts are increased by credits and de- ining the ledger.
creased by debits. Thus, A = L + E and debits
equal credits in a double-entry accounting
system.
5. Revenues provide resource inflows, and ex-
penses represent resource outflows. The net
result of revenues less expenses is income,
which is reflected in equity. Revenue ac-
counts are increased by credits and increase
equity; expense accounts are increased by
debits and reduce equity. Dividends also re-
duce equity, since they are distributions of
earnings to the owners. Therefore, the divi-
dends account is also increased by debits.
© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3
9. a. Increase asset (Supplies); increase liabil- appears correct, however, there may be er-
ity (Accounts Payable). rors. A transaction may have been omitted
completely, or it may have been recorded in-
b. Decrease asset (Cash); decrease equity
correctly or posted to the wrong account.
(by increasing Wages Expense).
These types of errors usually will not be iden-
c. Decrease asset (Cash); decrease equity
tified by preparing a trial balance.
(by increasing Utilities Expense).
d. Increase asset (Buildings); decrease an- 12. A trial balance is an internal document used
other asset (Cash); and increase a liabil- to summarize all of the account balances (as-
ity (Mortgage Payable). sets, liabilities, equity, revenues, expenses,
e. Increase asset (Cash); increase equity and dividends) in a company’s accounting
(Capital Stock). system. The balance sheet, on the other
f. Decrease asset (Cash); decrease equity hand, is a summary list of a company’s as-
(by increasing Dividends, which reduces sets, liabilities, and equity; the balance sheet
Retained Earnings). is frequently provided to interested parties
g. Decrease asset (increase in Cash with a both inside and outside a company.
greater decrease in Land); decrease eq-
13. Computers have not eliminated the need to
uity (Loss on Sale because proceeds are
analyze transactions. Computer accounting
less than cost).
systems can be programmed to handle the
10. A chart of accounts is a list of all accounts,
great bulk of routine transactions, such as
along with assigned account numbers, used
credit sales, collections on account, and so
by a particular entity in its accounting system.
forth. However, as illustrated in the remainder
The purpose of a chart of accounts is to nu-
of this text, many accounting journal entries
merically classify, or categorize, the accounts
involve the exercise of judgment by the ac-
for easy reference. In practice, the account
countant. For example, as explained in Chap-
numbers are used much more than the ac-
ter 6, at the end of each year the accountant
count names, especially in an automated
must estimate the amount of outstanding ac-
system.
counts receivable that will never be collected.
11. In a trial balance, if total debits equal total A computer can aid this process, but ulti-
credits; there is some assurance that the re- mately the decision must be made by a hu-
cording and posting functions have been per- man being.
formed satisfactorily. Even if the trial balance
Chapter 3
PRACTICE EXERCISES
PE 3-1 (LO2) Impact of a Transaction
a., b., and c.

Account Increase or Decrease Amount
Cash Increase $200,000
Notes Payable Increase 200,000
d. Total assets Increase by $200,000

Total liabilities Increase by $200,000
Total equity No impact
a., b., and c.

Cash Decrease $90,000
Land Increase 90,000
d. Total assets Increase by $90,000, decrease by $90,000;

no net impact
Total liabilities No impact
a., b., and c.

Cash Decrease $30,000
Notes Payable Decrease 30,000
d. Total assets Decrease by $30,000

Total liabilities Decrease by $30,000
Chapter 3
a., b., and c.

Cash Increase $180,000
Capital Stock Increase 180,000

Total liabilities No impact
Total equity Increase by $180,000
a., b., and c.

Cash Decrease $ 80,000
Buildings Increase 210,000
Mortgage Payable Increase 130,000

Total liabilities Increase by $130,000
PE 3-6 (LO2) Computing Ending Account Balances
Liabilities Equity
Assets Notes Mortgage Capital
Transaction Cash Land Buildings Payable Payable Stock
3–1 + 200,000 +200,000
3–2 – 90,000 + 90,000
3–3 – 30,000 – 30,000
3–4 + 180,000 + 180,000
3–5 – 80,000 + 210,000 + 130,000
Total $ 180,000 $ 90,000 $ 210,000 $170,000 $ 130,000 $ 180,000
PE 3-7 (LO2) Understanding Debits
Account DEBIT Increases or Decreases?

1. Accounts Payable Decreases
2. Capital Stock Decreases
3. Land Increases
4. Notes Payable Decreases
5. Mortgage Payable Decreases
6. Buildings Increases
Chapter 3
PE 3-8 (LO2) Understanding Credits
Account CREDIT Increases or Decreases?

1. Accounts Receivable Decreases
2. Capital Stock Increases
3. Equipment Decreases
4. Accounts Payable Increases
5. Buildings Decreases
6. Notes Payable Increases
PE 3-9 (LO2) Understanding Debits, Credits, and Retained Earnings
ACCOUNT BALANCE
Account Debit or Credit Increased or Decreased?
1. Retained Earnings Debit Decreased
2. Insurance Expense Credit Decreased
3. Dividends Credit Decreased
4. Interest Revenue Debit Decreased
5. Advertising Expense Debit Increased
6. Rent Revenue Credit Increased
PE 3-10 (LO2) Understanding Retained Earnings
Note: In this solution, the revenue, expense, and dividend account balances are
shown as additions to or subtractions from the retained earnings account, as ap-
propriate. As shown in Chapter 4, the actual process by which these account bal-
ances are reflected in the ending Retained Earnings balance is called the closing
process and is done in a summary fashion rather than account by account, as il-
lustrated here.
Retained Earnings
Debit (–) Credit (+)
Beg. bal. 16,000
a. Insurance Expense 2,400
c. Advertising Expense 3,100
e. Dividends 1,200
f. Interest Revenue 600
End. bal. 9,900
Chapter 3
PE 3-11 (LO3) Journal Entries
Cash .......................................................................................... 140,000

Notes Payable .................................................................... 140,000
Land .......................................................................................... 90,000

Cash ..................................................................................... 90,000
Notes Payable .......................................................................... 30,000

Cash ..................................................................................... 30,000
Cash .......................................................................................... 180,000

Capital Stock ...................................................................... 180,000
Buildings .................................................................................. 210,000

Cash ..................................................................................... 80,000
Mortgage Payable .............................................................. 130,000
Chapter 3
PE 3-16 (LO3) Journal Entries with Revenues, Expenses, and Dividends
a. Equipment ........................................................................ 260,000

Accounts Payable ....................................................... 260,000
b. Cash .................................................................................. 200,000

Service Revenue ......................................................... 200,000
c. Wages Expense ............................................................... 54,000

Cash .............................................................................. 54,000
d. Advertising Expense ...................................................... 25,000

Cash .............................................................................. 25,000
e. Cash .................................................................................. 50,000

Accounts Receivable ...................................................... 120,000
Service Revenue ......................................................... 170,000
f. Cash .................................................................................. 47,000
Accounts Receivable.................................................. 47,000
g. Accounts Payable ........................................................... 110,000

Cash .............................................................................. 110,000
h. Dividends ......................................................................... 17,000

Cash .............................................................................. 17,000
PE 3-17 (LO4) Posting
Cash Land
Beg. bal. 0 Beg. bal. 0
(3-11) 140,000 (3-12) 90,000
(3-12) 90,000 End. bal. 90,000
(3-13) 30,000
(3-14) 180,000
(3-15) 80,000
End. bal. 120,000
Chapter 3
PE 3-17 (LO4) (Continued)
Buildings Notes Payable

(3-15) 210,000 (3-11) 140,000
End. bal. 210,000 (3-13) 30,000
End. bal. 110,000
Mortgage Payable Capital Stock

(3-15) 130,000 (3-14) 180,000
End. bal. 130,000 End. bal. 180,000
PE 3-18 (LO4) Posting with Revenues, Expenses, and Dividends
Cash Accounts Receivable

b. 200,000 e. 120,000
c. 54,000 f. 47,000
d. 25,000 End. bal. 73,000
e. 50,000
f. 47,000
g. 110,000
h. 17,000
End. bal. 91,000
Equipment Accounts Payable

a. 260,000 a. 260,000
End. bal. 260,000 g. 110,000
End. bal. 150,000
Service Revenue Wages Expense

b. 200,000 c. 54,000
e. 170,000 End. bal. 54,000
End. bal. 370,000
Advertising Expense Dividends

d. 25,000 h. 17,000
End. bal. 25,000 End. bal. 17,000
Chapter 3
PE 3-19 (LO3) Preparing a Trial Balance
Debit Credit
Cash .......................................................................................... $211,000
Accounts Receivable .............................................................. 73,000
Land .......................................................................................... 90,000
Buildings .................................................................................. 210,000
Equipment ................................................................................ 260,000
Accounts Payable ................................................................... $150,000
Notes Payable .......................................................................... 110,000
Mortgage Payable .................................................................... 130,000
Capital Stock ............................................................................ 180,000
Dividends .................................................................................. 17,000
Service Revenue ...................................................................... 370,000
Wages Expense ....................................................................... 54,000
Advertising Expense ............................................................... 25,000
Totals ................................................................................... $940,000 $940,000
PE 3-20 (LO4) Using a Trial Balance to Prepare a Statement of Comprehensive

Income
Service revenue ....................................................................... $400,000

Expenses:
Wages expense .................................................................. $255,000
Utilities expense................................................................. 43,000
Rent expense ...................................................................... 25,000 323,000
Net income ............................................................................... $ 77,000
Other comprehensive income 0
Comprehensive income $ 77,000
PE 3-21 (LO4) Using a Trial Balance to Prepare a Balance Sheet
Assets
Current Assets:
Cash ................................................................................................................ $ 98,000
Accounts receivable ..................................................................................... 96,000
Non-current Assets:
Land ................................................................................................................ 90,000
Buildings ........................................................................................................ _250,000
Total assets............................................................................................ $534,000
Liabilities and Equity
Accounts payable .......................................................................................... $ 104,000
Notes Payable ................................................................................................ _120,000
Total liabilities .......................................................................................... $ 224,000
Chapter 3
Capital stock .................................................................................................. 250,000

Retained earnings ......................................................................................... 60,000*
Total equity ............................................................................................... _310,000
Total liabilities and equity .................................................................... $534,000
*Beginning retained earnings $0 + Net income $77,000 (see PE 3–20) –

Dividends $17,000=$60,000
PE 3-22 (LO4) Preparing a Statement of Cash Flows
Operating activities:
Collections from customers
($200,000+ $50,000+ $47,000) ..................................... $297,000
Payments for wages .......................................................... (54,000)
Payments for advertising.................................................. (25,000)
Net cash provided by operating activities...................... $218,000
Investing activities:
Purchase of land ................................................................ $ (90,000)
Purchase of buildings (cash down payment only)........ (80,000)
Purchase of equipment (payment of $260,000 payable) (110,000)
Net cash used by investing activities ............................. (280,000)
Financing activities:
Borrowed from bank.......................................................... $140,000
Repaid loan ......................................................................... (30,000)
Received from stockholders ............................................ 180,000
Paid cash dividends .......................................................... (17,000)
Net cash provided by financing activities ...................... 273,000
Net increase in cash................................................................ $211,000
Beginning cash balance ......................................................... 0
Ending cash balance .............................................................. $211,000
Note: Dividend Payment is classified as a financing activity.
Chapter 3
EXERCISES
E 3-1 (LO2) Accounting Equation
Transaction Assets = Liabilities + Equity

1. Took out school loan Increase (Cash) Increase
(School loan)
2. Paid month’s rent Decrease (Cash) Decrease (Increase

in expenses)
3. Sold computer Increase (Cash)

Decrease (Computer)
4. Received paycheck Increase (Cash) Increase (Increase

in revenues)
5. Received interest Increase (Cash) Increase (Increase

in revenues)
6. Made car payment Decrease (Cash) Decrease Decrease (Increase

(Car loan) in expenses)
E 3-2 (LO2) Accounting Elements: Increase/Decrease, Debit/Credit

Relationships
Item Increased with Transaction

Assets Debit entry *Purchased equipment on credit.
Liabilities Credit entry *Took out a bank loan.
Equity Credit entry *Recorded net income for the year.
Capital stock Credit entry Issued new shares of company stock.
Retained earnings Credit entry Recorded net income for the year.
Revenues Credit entry *Recorded monthly rent revenue.
Expenses Debit entry *Paid monthly salaries expense.
Dividends Debit entry Paid cash dividend.
*There is more than one answer. These answers are for references only.
Chapter 3
E 3-3 (LO2) Expanded Accounting Equation
Transaction Assets = Liabilities + Equity

1 + (Supplies) + (Accounts Payable) 0
2 + (Cash) 0 + (Revenue)
3 + (Cash) + (Notes Payable) 0
4 + (Land) + (Notes Payable) 0
– (Cash)
5 + (Cash) 0 + (Capital Stock)
6 – (Cash) 0 – (Expense)
7 – (Cash) – (Accounts Payable) 0
8 + (Cash) 0 0
+ (Notes Receivable)
– (Buildings)
9 – (Cash) 0 – (Dividends)
10 – (Cash) 0 – (Expense)
E 3-4 (LO2) Classification of Accounts
1. A 7. OE—E 13. L
2. OE—R 8. OE 14. A
3. A 9. L 15. A
4. OE—E 10. L 16. OE—E
5. OE 11. OE—R 17. L
6. L 12. A 18. OE—E
E 3-5 (LO2) Normal Account Balances
1. DR 7. DR 13. CR
2. CR 8. CR 14. DR
3. DR 9. CR 15. DR
4. DR 10. CR 16. DR
5. CR 11. CR 17. CR
6. CR 12. DR 18. DR
Chapter 3
E 3-6 (LO2) Analyzing the Statements about Accounting and the Recording
Process
1. False. An account is an accounting record of a specific asset, liability, or eq-

uity item.
2. False. An account shows increases and decreases in the item it relates to.
3. False. Each asset, liability, and equity item has a separate account.
4. True. An account has a left, or debit side, and a right, or credit side.
5. True.
E 3-7 (LO2) Impact of a Transaction
1.(3) 2.(4)(5) 3.(1) 4.(2) 5.(7) 6.(6) 7.None
E 3-8 (LO2) Relationships between Transactions and Accounting Equation
1.
(a) MileStone Co. issued shares in exchange for cash.

(b) MileStone Co. purchased office equipment for NT$15,000. MileStone Co. paid
NT$9,000 immediately, and the remaining balance on account.
(c) MileStone Co. purchased supplies for NT$350 cash.
(d) MileStone Co. performed NT$50,000 service for a customer. The customer paid
half cash and half on account.
(e) MileStone Co. borrowed cash from a bank on a note payable NT$1,000,000.
(f) MileStone Co. paid cash dividends NT$3,500.
(g) MileStone Co. paid insurance expense NT$3,000 for the month.
(h) MileStone Co. received NT$18,000 from customer.
(i) MileStone Co. paid interest expense NT$10,000 to the bank.
(j) MileStone Co. paid NT$8,000 salaries to employees.
2. (a) NT$30,000 + (d) NT$50,000 – (f) NT$3,500 – (g) NT$3,000 – (i) NT$10,000 –
(j) N$8,000 = NT$ 55,500
3. (d) NT$50,000 – ((g) NT$3,000 + (i) NT$10,000 +(j) NT$8,000) = NT$29,000
E 3-9 (LO2) Relationships of the Expanded Accounting Equation
1. December 31, 2021:

Total assets............................................................................................ $ 250,000
Less total liabilities ............................................................................... (115,000)
Total equity ............................................................................................ $ 135,000
Less retained earnings ......................................................................... (95,000)
Capital stock .......................................................................................... $ 40,000
Chapter 3
2. December 31, 2022:

Total assets............................................................................................ $ 300,000
Less total liabilities ............................................................................... (125,000)
Total equity ............................................................................................ $ 175,000
Less capital stock ................................................................................. (60,000)
Retained earnings ................................................................................. $ 115,000
3. Retained earnings, December 31, 2021 ............................................. $ 95,000
Plus net income for 2022 ..................................................................... X
Less dividends for 2022 ....................................................................... (6,500)
Retained earnings, December 31, 2022 ............................................. $ 115,000
Net income ............................................................................................. $ 26,500*
*($95,000 + X – $6,500 = $115,000; X = $26,500)
Revenues for 2022 ................................................................................ $ X
Less expenses for 2022 ....................................................................... (135,500)
Net income for 2022 .............................................................................. $ 26,500
Revenues................................................................................................ $ 162,000**
**(X – $135,500 = $26,500; X = $162,000)
Alternative solution:
Increase in Retained Earnings during year = $20,000 ($115,000 – $95,000)
$20,000 = Revenues (X) – Expenses ($135,500) – Dividends ($6,500) =
Revenues ($162,000)
E 3-10 (LO3) Journalizing Transactions
1. Cash .................................................................................. 90,000

Capital Stock ............................................................... 90,000
2. Cash .................................................................................. 45,000

Notes Payable ............................................................. 45,000
3. Salaries Expense............................................................. 53,000

Rent Expense................................................................... 4,100
Cash .............................................................................. 57,100
4. Inventory .......................................................................... 6,300

5. Accounts Payable ........................................................... 6,300

Cash .............................................................................. 6,300
6. Accounts Receivable ...................................................... 2,400

Sales Revenue ............................................................. 2,400
Cost of Goods Sold ........................................................ 1,350
© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3
Inventory ...................................................................... 1,350

7. Cash .................................................................................. 2,400
E 3-11 (LO3) Journalizing Transactions
1. Buildings .......................................................................... 100,000

Cash .............................................................................. 20,000
Notes Payable ............................................................. 80,000
2. Transportation Equipment ............................................. 12,000

3. Accounts Receivable ...................................................... 17,500

Service Revenue ......................................................... 17,500
4. Accounts Payable ........................................................... 12,000
Cash .............................................................................. 12,000
5. Cash .................................................................................. 70,000

Capital Stock ............................................................... 70,000
6. Cash .................................................................................. 9,500

7. Utilities Expense ............................................................. 500

Cash .............................................................................. 500
8. Dividends ......................................................................... 3,000

Cash .............................................................................. 3,000
E 3-12 (LO3) Journal Entries
July 2 Cash .......................................................................... 320,000

Capital Stock ...................................................... 320,000
Issued 80,000 shares of capital stock.
4 Equipment................................................................ 100,000
Cash .................................................................... 75,000
Notes Payable .................................................... 25,000
Purchased equipment with 75% cash and
25% on a note payable.
5 Utilities Expense ..................................................... 2,300

Cash .................................................................... 2,300
Chapter 3
Paid utilities.
13 Supplies ................................................................... 250,000

Cash .................................................................... 75,000
Accounts Payable ............................................. 175,000
Purchased supplies, 30% cash and 70%
on account.
14 Insurance Expense ................................................. 6,000

Cash .................................................................... 6,000
Paid insurance premium.
18 Accounts Receivable ............................................. 81,000

Service Revenue ............................................... 81,000
Provided service on account.
20 Cash .......................................................................... 8,500

Accounts Receivable ........................................ 8,500
Collected accounts receivable.
24 Cash .......................................................................... 43,000

Service Revenue ............................................... 43,000
Provided service for cash.
27 Property Tax Expense ............................................ 1,200

Cash .................................................................... 1,200
Paid property taxes.
30 Accounts Payable .................................................. 175,000

Cash .................................................................... 175,000
Paid accounts payable.
E 3-13 (LO3) Journal Entries
a. Equipment ........................................................................ 64,000

b. Land .................................................................................. 450,000

Cash .............................................................................. 160,000
Notes Payable ............................................................. 290,000
c. Accounts Payable ........................................................... 41,000

Cash .............................................................................. 41,000
d. No entry
Chapter 3
e. Cash .................................................................................. 18,000

Sales Revenue ............................................................. 34,000
f. Cost of Goods Sold ........................................................ 22,000

Inventory ...................................................................... 22,000
g. Cash .................................................................................. 84,000

Notes Payable ............................................................. 84,000
h. Dividends ......................................................................... 10,000

Cash .............................................................................. 10,000
i. Cash .................................................................................. 60,000

Capital Stock ............................................................... 60,000
j. No entry
k. Notes Payable .................................................................. 16,000

Cash .............................................................................. 16,000
l. Cash .................................................................................. 1,000

Unearned Sales Revenue........................................... 1,000
E 3-14 (LO3) Analysis of Journal Entries
a. The company purchased a building for $90,000. A down payment of $35,000

was paid in cash. A mortgage loan was arranged for the remaining $55,000.
b. An investor invested $25,000 cash in the company in exchange for capital
stock.
c. The company received a loan from the bank for $40,000.
d. The company paid salaries of $12,000.
e. The company purchased inventory on account for $12,500.
f. The company sold inventory for $84,000 on account. The inventory cost
$51,000.
Note: sales is sales revenue.
g. The company received a payment on account for $62,000.
h. The company paid $38,000 on account.
Chapter 3
E 3-15 (LO3, LO4) Journalizing and Posting Transactions
July 1 Paid advertising expense, $3,420.

5 Collected $9,500 cash from customers as payments on accounts.
10 Purchased $20,000 of supplies on credit.
14 Provided services on account for $18,000.
23 Paid rent of $2,000.
25 Paid $5,000 to creditors as payments on account.
28 Collected $8,000 cash from customers as payments on account.
30 Purchased equipment for $1,500 and land for $4,000 in cash.
E 3-16 (LO3, LO4) Journalizing and Posting Transactions
July 1 Paid advertising expense, €3,420.

5 Collected €9,500 cash from customers as payments on their accounts.
10 Purchased €20,000 of inventory on credit.
14 Sold inventory costing €15,000 to customers on account for €18,000.
23 Paid rent of €2,000.
25 Paid €5,000 to creditors as payments on account.
28 Collected €8,000 from customers as payments on account.
30 Purchased equipment for €1,500 and land for €4,000. Paid cash.
E 3-17 (LO 4) Concepts about the Ledger
1. False. The general ledger contains all the asset, liability, and equity accounts.
2. True.
3. False. The accounts in the general ledger are arranged in financial statement
order: first the assets, then the liabilities, share capital, retained earnings, div-
idends, revenues, and expenses.
4. False. The general ledger is not a book of original entry; transactions are first
recorded in the general journal, then in the general ledger.
Chapter 3
E 3-18 (LO4) Preparing Trial Balance
Bin Music Inc.

Trial Balance
December 31, 2022
Debit Credit
Cash ($95,670 – Debit total without Cash $71,016) ................ $24,654
Accounts Receivable .................................................................. 11,576
Prepaid Insurance ....................................................................... 2,000
Equipment .................................................................................... 50,000
Accounts Payable ....................................................................... $ 9,500
Notes Payable .............................................................................. 27,640
Salaries and Wages Payable...................................................... 900
Capital Stock ................................................................................ 40,000
Retained Earnings ....................................................................... 5,630
Dividends ...................................................................................... 700
Service Revenue .......................................................................... 12,000
Salaries and Wages Expense .................................................... 4,500
Maintenance and Repairs Expense .......................................... 860
Gasoline Expense ....................................................................... 600
Utilities Expense .......................................................................... 780
$95,670 $95,670
E 3-19 (LO4) Posting Journal Entries
Cash Accounts Receivable Equipment

7/2 320,000 7/4 75,000 7/18 81,000 7/20 8,500 7/4 100,000
7/20 8,500 7/5 2,300 Bal. 72,500 Bal. 100,000
7/24 43,000 7/13 75,000
7/14 6,000
7/27 1,200
7/30 175,000
Bal. 37,000
Supplies Accounts Payable Notes Payable

7/13 250,000 7/30 175,000 7/13 175,000 7/4 25,000
Bal. 0
Chapter 3
Capital Stock Service Revenue Utilities Expense

7/2 320,000 7/18 81,000 7/5 2,300
7/24 43,000
Bal. 124,000
Property Tax Expense Insurance Expense

7/27 1,200 7/14 6,000
E 3-20 (LO4) Trial Balance
Molly, Inc.
Trial Balance
July 31, 2022
Debit Credit
Cash .......................................................................................... $ 22,300
Supplies .................................................................................... 350
Land .......................................................................................... 27,000
Buildings .................................................................................. 56,000
Equipment ................................................................................ 18,000
Accounts Payable ................................................................... $ 14,200
Mortgage Payable (due 2025) ................................................ 28,000
Capital Stock ............................................................................ 30,000
Retained Earnings ................................................................... 31,350*
Service Revenue ...................................................................... 49,900
Rent Expense ........................................................................... 2,500
Insurance Expense.................................................................. 4,800
Miscellaneous Expenses ........................................................ 3,100
Salaries Expense ..................................................................... 8,000
Utilities Expense ...................................................................... 1,700
Totals ................................................................................... $153,450 $153,450
*X + ($14,200 + $28,000 + $30,000 + $49,900) = $153,450; X = $31,350
Chapter 3
E 3-21 (LO4) Trial Balance
Marshall, Inc.
Trial Balance
November 30, 2022
Debit Credit
Cash .......................................................................................... $ 35,000
Short-Term Investments ......................................................... 15,000
Notes Receivable ..................................................................... 20,000
Land .......................................................................................... 125,000
Buildings .................................................................................. 150,000
Equipment ................................................................................ 55,000
Salaries Payable ...................................................................... 2,000
Notes Payable .......................................................................... 150,000
Capital Stock ............................................................................ 173,000*
Retained Earnings ................................................................... 40,000
Service Revenue ...................................................................... 187,000
Other Expenses ....................................................................... 1,000
Property Tax Expense ............................................................ 1,500
Rent Expense ........................................................................... 7,500
Salaries Expense ..................................................................... 155,000
Totals ................................................................................... $702,000 $702,000
*Capital Stock is the difference between the total given credits and total debits:
Total debits $ 702,000
Total given credits (529,000)
Capital Stock $ 173,000
E 3-22 (LO3 LO4) Journal Entries and Impacts of Transactions on Performance

and Cash Flows
1. Journal entries:
1. Cash .......................................................................... 10,000

Capital Stock ...................................................... 10,000
2. Inventory .................................................................. 3,000

3. Accounts Receivable ............................................. 2,500

Sales Revenue ................................................... 2,500
Chapter 3
Cost of Goods Sold ................................................. 1,500

Inventory ............................................................ 1,500
4. Salaries Expense .................................................... 800

Cash .................................................................... 800
5. Cash .......................................................................... 2,490

Sales Revenue ................................................... 2,490
Cost of Goods Sold ................................................ 1,500
Inventory ............................................................ 1,500
2. Net income = $2,500 + $2,490 – $1,500 – $1,500 – $800 = $1,190
3. Cash generated from operating activities = $2,490 – $800 = $1,690
E 3-23 (LO3 LO4) Posting and Trial Balance
Cash
(1) 10,000 (4) 800
(5) 2,490
Balance 11,690
Accounts Receivable
(3) 2,500
Bal. 2,500
Inventory
(2) 3,000 (3) 1,500
(5) 1,500
Bal. 0
Accounts Payable
(2) 3,000
Bal. 3,000
Capital Stock
(1) 10,000
Bal. 10,000
Sales Revenue
(3) 2,500
(5) 2,490
Bal. 4,990
Cost of Goods Sold
(3) 1,500
(5) 1,500
Bal. 3,000
Salaries Expense
(4) 800
Bal. 800
Chapter 3
Trial Balance:
Lawrence Company
Trial Balance
September 30, 2022
Debit Credit
Cash .......................................................................................... $ 11,690
Capital Stock ............................................................................ 10,000
Sales Revenue ......................................................................... __4,990
Cost of Goods Sold ................................................................. 3,000
Salaries Expense ..................................................................... ___800
Totals ................................................................................... $17,990 $17,990
E 3-24 (LO4) Trial Balance and Financial Statements
Lawrence Company
Statement of Comprehensive Income
For the Month Ended September 30, 2022
Sales Revenue ........................................................................ $ 4,990
Cost of Goods Sold ................................................................. $(3,000)
Salaries Expense ..................................................................... (800) (3,800)
Net Income ............................................................................... $1,190
Other Comprehensive Income ............................................... ____0
Comprehensive Income.......................................................... $1,190
Lawrence Company
Balance Sheet
September 30, 2022
Assets Liabilities and Equity

Cash ..................................... $11,690 Accounts Payable ........... $ 3,000
Accounts Receivable ......... __2,500 Capital Stock .................... 10,000
Retained Earnings ........... __1,190
Total assets ................... $14,190 Total liabilities and equity $14,190
Chapter 3
PROBLEMS
P 3-1 (LO2, LO3) Transaction Analysis and Journal Entries
1. a. Equipment................................................................ 115,600
Cash .................................................................... 57,800
b. Supplies ................................................................... 3,300
c. Utilities Expense ..................................................... 720
Cash .................................................................... 720
d. Cash .......................................................................... 500
Accounts Receivable ............................................. 1,000
Rent Revenue .................................................... 1,500
e. Repairs Expense ..................................................... 5,120
Cash .................................................................... 5,120
f. Cash .......................................................................... 800
Rent Revenue .................................................... 800
g. Cash .......................................................................... 30,000

Notes Payable .................................................... 30,000
P 3-2 (LO3, LO4) Journal Entries and Trial Balance
1. a. Cash .......................................................................... 42,000

Accounts Receivable ..................................... 42,000
b. Accounts Payable ................................................... 33,000
Cash ................................................................. 33,000
c. Utilities Expense ..................................................... 12,600

Cash ................................................................. 12,600
d. Cash .......................................................................... 333,000
Service Revenue ............................................. 370,000
e. Interest Expense ..................................................... 30,000

Mortgage Payable ................................................... 20,000
Cash ................................................................. 50,000
Chapter 3
P 3-2 (LO3, LO4) (Continued)
f. Salaries Expense .................................................... 120,000

Cash ................................................................. 120,000
g. Notes Payable ......................................................... 10,000
Cash ................................................................. 10,000
2.
Cash Accounts Receivable
1/1 63,000 (b) 33,000 1/1 147,000 (a) 42,000
(a) 42,000 (c) 12,600 (d) 37,000
(d) 333,000 (e) 50,000
(f) 120,000
(g) 10,000
Bal. 212,400 Bal. 142,000
Buildings Accounts Payable Mortgage Payable

1/1 416,000 (b) 33,000 1/1 33,000 (e) 20,000 1/1 276,000
Bal. 0 Bal. 256,000
Notes Payable Capital Stock Retained Earnings

(g) 10,000 1/1 137,000 1/1 115,000 1/1 65,000
Bal. 127,000
Service Revenue Salaries Expense

(d) 370,000 (f) 120,000
Utilities Expense Interest Expense

(c) 12,600 (e) 30,000
Chapter 3
Gammon Corporation
Trial Balance
December 31, 2022
Debit Credit
Cash ............................................................................ $ 212,400
Accounts Receivable ................................................ 142,000
Buildings .................................................................... 416,000
Mortgage Payable ..................................................... $ 256,000
Notes Payable ............................................................ 127,000
Capital Stock.............................................................. 115,000
Retained Earnings .................................................... 65,000
Service Revenue ....................................................... 370,000
Salaries Expense....................................................... 120,000
Utilities Expense ....................................................... 12,600
Interest Expense ....................................................... 30,000
Totals..................................................................... $ 933,000 $ 933,000
3. The purpose of the trial balance is to determine only whether total debits equal
total credits. Thus, several types of errors can exist even though total debits
equal total credits. These errors could include completely omitting a transac-
tion, recording a transaction incorrectly, and posting a transaction to the
wrong accounts.
Chapter 3
P 3-3 (LO3, LO4) Journalizing and Posting
1. Sept. 1 Cash............................................................... 200,000

Capital Stock........................................... 200,000
2 Wages Expense ........................................... 23,000
Cash ......................................................... 23,000
4 Equipment .................................................... 75,000
Accounts Payable .................................. 75,000
5 Utilities Expense .......................................... 1,800
Cash ......................................................... 1,800
9 Insurance Expense ...................................... 1,500
Cash ......................................................... 1,500
11 Cash............................................................... 20,000
Accounts Receivable .................................. 50,000
Service Revenue .................................... 70,000
15 Supplies ........................................................ 5,000
21 Cash............................................................... 25,000
Accounts Receivable ............................. 25,000
25 Accounts Payable ........................................ 77,500
Cash ......................................................... 77,500
2.
9/1 200,000 9/2 23,000 9/11 50,000 9/21 25,000 9/4 75,000
9/11 20,000 9/5 1,800
9/21 25,000 9/9 1,500
9/25 77,500
Bal. 141,200 Bal. 25,000
Supplies Accounts Payable Capital Stock

9/15 5,000 9/25 77,500 9/4 75,000 9/1 200,000
9/15 5,000
Bal. 2,500
Chapter 3
Service Revenue Insurance Expense

9/11 70,000 9/9 1,500
Utilities Expense Wages Expense

9/5 1,800 9/2 23,000
3. The owners should look at the cash account in the general ledger. The general
ledger is a “book of accounts” in which data from transactions recorded in
journals are posted and summarized. Thus, the owners would find the amount
of cash on hand in the general ledger cash account.
P 3-4 (LO3, LO4) Journal Entries from Ledger Analysis
1. (a) Cash .......................................................................... 150,000

Capital Stock ...................................................... 150,000
(b) Buildings .................................................................. 210,000
Cash .................................................................... 80,000
Mortgage Payable ............................................. 130,000
(c) Cash .......................................................................... 60,000
Notes Payable .................................................... 60,000
(d) Supplies ................................................................... 43,000
Cash .................................................................... 8,000
(e) Cash .......................................................................... 45,000
Service Revenue ............................................... 90,000
(f) Wages Expense ...................................................... 18,000
Cash .................................................................... 18,000
(g) Notes Payable ......................................................... 60,000
Interest Expense ..................................................... 3,000
Cash .................................................................... 63,000
(h) Accounts Payable ................................................... 35,000
Cash .................................................................... 35,000
(i) Cash .......................................................................... 35,000
Accounts Receivable ........................................ 35,000
Chapter 3
2. Service revenue..................................................................................... $ 90,000

Less: Wages expense ......................................................................... (18,000)
Interest expense ....................................................................... (3,000)
Net income ............................................................................................. $ 69,000
P 3-5 (LO3, LO4) Journalizing and Posting Transactions
1. 2022
Mar. 1 Inventory ....................................................... 26,500
4 Cash............................................................... 2,500
5 Equipment .................................................... 1,500
Cash ......................................................... 1,500
6 Accounts Receivable .................................. 20,000
Sales Revenue ........................................ 20,000
Cost of Goods Sold ..................................... 15,000
Inventory ................................................. 15,000
10 Rent Expense ............................................... 525
Cash ......................................................... 525
15 Utilities Expense .......................................... 50
Cash ........................................................ 50
17 Salaries Expense ......................................... 150
Cash ......................................................... 150
20 Cash............................................................... 16,500
25 Property Tax Expense ................................. 600
Cash ......................................................... 600
26 Cash............................................................... 15,000
Sales Revenue ........................................ 15,000
Cost of Goods Sold ..................................... 10,000
Inventory ................................................. 10,000
28 Accounts Payable ........................................ 26,500
Cash ......................................................... 26,500
Chapter 3
2.
3/4 2,500 3/5 1,500 3/6 20,000 3/4 2,500 3/5 1,500
3/20 16,500 3/10 525 3/20 16,500
3/26 15,000 3/15 50
3/17 150
3/25 600
3/28 26,500
Bal. 4,675 Bal. 1,000
Inventory Accounts Payable Cost of Goods Sold

3/1 26,500 3/6 15,000 3/28 26,500 3/1 26,500 3/6 15,000
3/26 10,000 3/26 10,000
Bal. 1,500 Bal. 0 Bal. 25,000
Rent Expense Utilities Expense Salaries Expense

3/10 525 3/15 50 3/17 150
Property Tax Expense Sales Revenue

3/25 600 3/6 20,000
3/26 15,000
Bal. 35,000
P 3-6 (LO3, LO4) Unifying Concepts: Compound Journal Entries, Posting, Trial
Balance
1. (a) Cash .......................................................................... 30,000

Supplies ................................................................... 2,500
Land .......................................................................... 20,000
Buildings .................................................................. 165,000
Office Equipment .................................................... 13,500
Notes Payable .................................................... 6,000
Capital Stock ...................................................... 225,000
(b) Cash .......................................................................... 20,000
Service Revenue ............................................... 52,000
(c) Notes Payable ......................................................... 6,000
Interest Expense ..................................................... 500
Cash .................................................................... 6,500
(d) Supplies ................................................................... 1,400
Cash .................................................................... 600
Chapter 3
Notes Payable .................................................... 800

(e) Office Equipment .................................................... 12,000
Cash .................................................................... 6,000
Capital Stock ...................................................... 6,000
(f) Transportation equipment ..................................... 25,000
Cash .................................................................... 5,000
Notes Payable .................................................... 20,000
2.
Cash Accounts Receivable Supplies
(a) 30,000 (c) 6,500 (b) 32,000 (a) 2,500
(b) 20,000 (d) 600 (d) 1,400
(e) 6,000
(f) 5,000
Bal. 31,900 Bal. 3,900
Land Buildings
(a) 20,000 (a) 165,000
Office Equipment Transportation Equipment Notes Payable

(a) 13,500 (f) 25,000 (c) 6,000 (a) 6,000
(e) 12,000
(d) 800
(f) 20,000
Bal. 25,500 Bal. 20,800
Capital Stock Service Revenue Interest Expense

(a) 225,000 (b) 52,000 (c) 500
(e) 6,000
Bal. 231,000
3. Shaw Company
Trial Balance
December 31, 2022
Debit Credit
Cash .................................................................................. $ 31,900
Supplies............................................................................ 3,900
Land .................................................................................. 20,000
Buildings .......................................................................... 165,000
Office Equipment ............................................................ 25,500
Transportation equipment ............................................. 25,000
Notes Payable .................................................................. $ 20,800
Chapter 3
Capital Stock.................................................................... 231,000

Service Revenue ............................................................. 52,000
Interest Expense ............................................................. 500
Totals........................................................................... $303,800 $303,800
P 3-7 (LO3, LO4) Unifying Concepts: Journal Entries, T-Accounts, Trial Balance
1. 2022
May 3 Accounts Payable ........................................ 3,000
Cash ......................................................... 3,000
6 Cash............................................................... 2,450
7 Cash............................................................... 3,000
Accounts Receivable .................................. 2,000
Service Revenue .................................... 5,000
15 Notes Payable .............................................. 2,500

Cash ......................................................... 2,500
21 Cash............................................................... 1,000
Capital Stock........................................... 1,000
23 Cash............................................................... 3,750
Service Revenue .................................... 3,750
25 Salaries Expense ......................................... 1,000

Cash ......................................................... 1,000
26 Rent Expense ............................................... 250
Cash ......................................................... 250
29 Office Equipment ......................................... 250
Cash ......................................................... 250
2.
Cash
Beg. bal. 8,050 5/3 3,000
5/6 2,450 5/15 2,500
5/7 3,000 5/25 1,000
5/21 1,000 5/26 250
5/23 3,750 5/29 250
End. bal. 11,250
Chapter 3
Accounts Receivable Buildings

Beg. bal. 2,450 5/6 2,450 Beg. bal. 30,000
5/7 2,000
End. bal. 2,000 End. bal. 30,000
Office Equipment Notes Payable

Beg. bal. 2,000 5/15 2,500 Beg. bal. 12,500
5/29 250
End. bal. 2,250 End. bal. 10,000
Accounts Payable Capital Stock

5/3 3,000 Beg. bal. 6,000 Beg. bal. 15,000
5/21 1,000
End. bal. 3,000 End. bal. 16,000
Retained Earnings Service Revenue

Beg. bal. 9,000 5/7 5,000
5/23 3,750
End. bal. 8,750
Salaries Expense Rent Expense
5/25 1,000 5/26 250
3. Chris Company
Trial Balance
May 31, 2022
Debit Credit
Cash .................................................................................. $ 11,250
Buildings .......................................................................... 30,000
Office Equipment ............................................................ 2,250
Notes Payable .................................................................. $ 10,000
Accounts Payable ........................................................... 3,000
Capital Stock.................................................................... 16,000
Retained Earnings .......................................................... 9,000
Service Revenue ............................................................. 8,750
Salaries Expense............................................................. 1,000
Rent Expense................................................................... 250
Totals ................................................................................ $46,750 $46,750
Chapter 3
P 3-8 (LO2, LO4) Unifying Concepts: T-Accounts, Trial Balance, and Statement of
Comprehensive Income
1. ASSETS
Cash Accounts Receivable Notes Receivable
(a) 50,000 (b) 5,000 (d) 25,000 (f) 9,500 (m) 3,000 (n) 3,000
(e) 10,000 (g) 15,000 (m) 13,000
(f) 9,500 (h) 5,500
(m) 10,000 (i) 12,000
(n) 3,250 (k) 2,500
(p) 3,000 (l) 7,500
(q) 1,500 (o) 600
(r) 11,200
Bal. 27,950 Bal. 2,500 Bal. 0
Supplies Land Buildings

(j) 1,500 (g) 10,000 (p) 3,000 (g) 60,000
Bal. 7,000
Equipment Transportation Equipment

(b) 5,000 (c) 18,000
LIABILITIES
Accounts Payable Notes Payable Mortgage Payable
(i) 12,000 (c) 18,000 (r) 10,000 (e) 10,000 (h) 2,750 (g) 55,000
(k) 2,500 (j) 1,500
Bal. 5,000 Bal. 0 Bal. 52,250
EQUITY
Capital Stock
(a) 50,000
RETAINED EARNINGS
Service Revenue Rent Revenue Interest Revenue
(d) 25,000 (q) 1,500 (n) 250
Wages Expense Utilities Expense Interest Expense

(l) 7,500 (o) 600 (h) 2,750
(r) 1,200
Bal. 3,950
Chapter 3
2. GOGORA, Inc.
Trial Balance
December 31, 2022
Debit Credit
Cash .................................................................................. $ 27,950
Notes Receivable ............................................................ 0
Supplies............................................................................ 1,500
Land .................................................................................. 7,000
Buildings .......................................................................... 60,000
Equipment ........................................................................ 5,000
Transportation Equipment ............................................. 18,000
Accounts Payable ........................................................... $ 5,000
Notes Payable .................................................................. 0
Mortgage Payable ........................................................... 52,250
Capital Stock.................................................................... 50,000
Service Revenue ............................................................. 25,000
Rent Revenue .................................................................. 1,500
Interest Revenue ............................................................. 250
Wages Expense ............................................................... 7,500
Utilities Expense ............................................................. 600
Interest Expense ............................................................. 3,950
Totals........................................................................... $134,000 $134,000
3. GOGORA, Inc.
For the Year Ended December 31, 2022
Service revenue............................................................... $25,000
Operating expenses:
Wages expense .......................................................... $7,500
Utilities expense ........................................................ 600 (8,100)
Operating income............................................................ $ 16,900
Other revenues and expenses:
Interest expense ........................................................ $(3,950)
Rent revenue .............................................................. 1,500
Interest revenue ......................................................... 250 (2,200)
Net income ....................................................................... $ 14,700
Other comprehensive income 0
Comprehensive income $14,700
Chapter 3
P 3-9 (LO4) Correcting a Trial Balance
Jacubs Company, Inc.

Trial Balance
November 30, 2022
Debit Credit
Cash .......................................................................................... $ 18,700
Notes Receivable ..................................................................... 12,000
Land .......................................................................................... 95,850
Buildings .................................................................................. 210,700
Equipment ................................................................................ 37,900
Office Equipment ..................................................................... 18,000
Notes Payable .......................................................................... 198,350
Wages Payable ........................................................................ 12,000
Capital Stock ............................................................................ 110,000
Retained Earnings ................................................................... 21,400
Service Revenue ...................................................................... 125,600
Wages Expense ....................................................................... 87,900
Rent Expense ........................................................................... 8,700
Other Expenses ....................................................................... 2,000
Property Tax Expense ............................................................ 1,300
Totals ................................................................................... $566,000 $566,000
Chapter 3
P 3-10 (LO4) From Transactions to Financial Statements
1.
Units: NT Dollars
Dat Cash + Accounts + Sup- + Equip- = Accounts + Notes + Capital - Divi- + Reve- - Ex- Explanations for
e Receiva- plies ment Payable Payable Stock dends nues penses changes in re-
ble tained earnings
7/2 +$60,000 = + $60,000 -
7/4 -5,000 + $36,000 = + $31,000
7/5 -6,000 = - $6,000 Rent expense
7/7 + $7,000 = $7,000
7/12 -1,000 = - 1,000 Advertising ex-
pense
7/14 + $80,000 = + $80,000 Service revenue
7/16 30,000 = + 30,000 Service revenue
7/18 -7,000 = -7,000
7/23 50,000 - 50,000 =
7/27 -40,000 = - 40,000 Salaries expense
7/29 -2,000 = - 2,000 Utilities expense
7/31 -10,000 = - $10,000 Dividends
Note: Use specific Revenues/Expenses accounts, instead of Retained Earnings.
© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different f rom the U.S. Edition. May not be scanned, copied,
duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3
P 3-10 (LO4) (Continued)
2.
Shinny Laundry
For One Month Ended July 31, 2022
Service revenue............................................................... $110,000
Expenses:
Rent expense ............................................................. $ 6,000
Advertising expense ................................................. 1,000
Salaries expense ....................................................... 40,000
Utilities expense ........................................................ 2,000 (49,000)
Net income ....................................................................... $ 61,000
Other comprehensive income ....................................... 0
Comprehensive income ................................................. $ 61,000
3.
Shinny Laundry
Balance Sheet
July 31,2022
Assets
Current assets:
Cash .......................................................................... $ 69,000
Accounts receivable ............................................... 30,000
Supplies ................................................................... 7,000
Total current assets .......................................... $106,000
Non-current assets:
Equipment ................................................................ 36,000
Total assets ................................................................... $142,000
Current liabilities:
Notes payable .......................................................... $ 31,000
Total liabilities.................................................... $ 31,000
Equity:
Capital stock ............................................................ $ 60,000
Retained earnings ................................................... 51,000
Total equity ........................................................ 111,000
Total liabilities and equity ........................................... $142,000
Chapter 3
P 3-11 (LO4) Relationships of Account Items in the Trial Balance
1.
(a) $85,000 – $45,000 = $40,000
(b) $55,000 + $50,000 = $105,000
(c) changes in equity = $50,000 – $40,000 = $10,000
X + $370,000 – $355,000 – $20,000 = $10,000
X = $15,000
(d) $99,000 – $50,000 = $49,000
(e) $137,100 – $65,000 = $72,100
(f) changes in equity = $72,100 – $50,000 = $22,100
$12,000+$448,100 – $420,000 – X = $22,100
X = $18,000
(g) $76,000+$32,000 = $108,000
(h) $132,000–$47,000 = $85,000
(i) changes in equity = $47,000 – $32,000 = $15,000
$10,000 + X – $385,000 – $15,000 = $15,000
X = $405,000
(j) $144,000 – $100,000 = 44,000
(k) $50,000 + $122,000 = $172,000
(l) changes in equity = $122,000 – $100,000 = $22,000
$30,000 + $500,000 – X – $11,000 = $22,000
X = $497,000
2.
Mayday Company
Statement of Retained Earnings
Retained earnings, January 1, 2022 ............................. $32,900
Plus: Net income ............................................................. 28,100
Less: Dividends............................................................... (18,000)
Retained earnings, December 31, 2022 ...................... $43,000
P 3-12 (LO4) Preparing Correct Trial Balance
Paradise Inc.
Trial Balance
April 30, 2022
______
Debit Credit
Cash ($3,840 + ①$270) ............................................................... $ 4,110
Accounts Receivable ($2,898 – ①$270) ................................... 2,628
Supplies ($800 – ②$510) ............................................................ 290
Equipment ($3,000 + ②$510) ..................................................... 3,510
Accounts Payable ($2,666 – ⑤$390 –⑤$309).......................... $ 1,967
Unearned Service Revenue........................................................ 2,200
Capital Stock–Common .............................................................. 9,000
Dividends ($800 + ⑥$400) .......................................................... 1,200
Service Revenue ($2,380 + ③$801) ........................................... 3,181
Salaries and Wages Expense ($3,400 + ④$700 – ⑥$400) 3,700
Utilities Expense ..........................................................................
910
$16,348 $16,348
Note: The parentheses and the amounts wherein as well as the numbers in circles
are shown for readers to understand the rationale only.
P 3-13 (LO4) Preparing Correct Trial Balance and Statement of Comprehensive

Income and Balance Sheet
1.
XKQ Company
Trial Balance
December 31, 2022
Debit_ _Credit_
Cash ............................................................................................. $ 1,200
Accounts Receivable .................................................................. 3,000
Notes Receivable ......................................................................... 4,500
Supplies ........................................................................................ 300
Land .............................................................................................. 18,000
Accounts Payable ....................................................................... $ 2,000
Notes Payable .............................................................................. 3,000
Capital Stock ................................................................................ 20,000
Dividends ...................................................................................... 380
Service Revenue .......................................................................... 12,760
Salaries Expense ......................................................................... 10,000
Utilities Expense .......................................................................... 380
Total .............................................................................................. $37,760 $37,760
2.
XKQ Company
Service Revenue .......................................................................... $12,760

Salaries Expense ......................................................................... $(10,000)
Utilities Expense .......................................................................... (380) (10,380)
Net Income ................................................................................... $ 2,380
Chapter 3
Other Comprehensive Income ................................................... 0

Comprehensive Income.............................................................. $2,380
3.
XKQ Company
Balance Sheet
December 31, 2022
Assets Liabilities and Equity

Cash ..................................... $ 1,200 Accounts Payable ........... $ 2,000
Accounts Receivable ......... 3,000 Notes Payable .................. 3,000
Notes Receivable ................ 4,500 Total liabilities .............. $ 5,000
Supplies ............................... 300 Capital Stock .................... 20,000
Land ..................................... 18,000 Retained Earnings ........... 2,000
Total equity .................. $22,000
Total assets ..................... $27,000 Total liabilities and equity $27,000
Retained earnings = Net income $2,380 – Dividends $380 = $2,000
ANALYTICAL ASSIGNMENTS
AA 3-1 Analyzing Transactions

Cumulative Spreadsheet Project
HANDYMAN
Chapter 3, Part 1
Year
2022
BALANCE SHEET --------
Assets
Cash 10
Receivables 27
Inventory 153
Total Current Assets 190
Property, Plant, & Equipment 199

Accumulated Depreciation 9
Total Assets 380
Liabilities
Accounts Payable 74
Short-term Loans Payable 10
Total Current Liabilities 84
Non-current Debt 207

Total Liabilities 291
Equity
Capital Stock 50
Retained Earnings (as of 12/31) 39
Total Liabilities and Equities 380

+ Net Income 8
- Dividends 0
STATEMENT OF COMPREHENSIVE INCOME
Sales 700
Cost of Goods Sold 519
Gross Profit 181
Other Operating Expenses 160
Operating Income 21
Interest Expense 9
Income Before Taxes 12
Income Tax Expense 4
Net Income 8
Other Comprehensive Income 0
Comprehensive Income 8
Chapter 3
HANDYMAN
Chapter 3, Part 2 a
Year
2022
Assets
Cash 30
Receivables 7
Inventory 153

Total Assets 380
Liabilities
Accounts Payable 74

Equity
Capital Stock 50

+ Net Income 8
- Dividends 0
Sales 700
Gross Profit 181
Operating Income 21
Interest Expense 9
Net Income 8
HANDYMAN
Chapter 3, Part 2 b
Year
2022
Assets
Cash 10
Receivables 27
Inventory 183

Total Assets 410
Liabilities
Accounts Payable 104

Equity
Capital Stock 50

+ Net Income 8
- Dividends 0
Sales 700
Gross Profit 181
Operating Income 21
Interest Expense 9
Net Income 8
Chapter 3
HANDYMAN
Chapter 3, Part 2 c
Year
2022
Assets
Cash 10
Receivables 27
Inventory 153

Total Assets 480
Liabilities
Accounts Payable 74

Equity
Capital Stock 50

+ Net Income 8
- Dividends 0
Sales 700
Gross Profit 181
Operating Income 21
Interest Expense 9
Net Income 8
HANDYMAN
Chapter 3, Part 2 d
Year
2009
Assets
Cash 10
Receivables 27
Inventory 153

Total Assets 480
Liabilities
Accounts Payable 74

Equity
Capital Stock 150

+ Net Income 8
- Dividends 0
Sales 700
Gross Profit 181
Operating Income 21
Interest Expense 9
Net Income 8
Chapter 3
HANDYMAN
Chapter 3, Part 2 e
Year
2022
Assets
Cash 10
Receivables 27
Inventory 153

Total Assets 380
Liabilities
Accounts Payable 74
Long-term Debt 207

Equity
Capital Stock 50

+ Net Income 8
- Dividends 20
Sales 700
Gross Profit 181
Operating Income 21
Interest Expense 9
Net Income 8
HANDYMAN
Chapter 3, Part 2 f
Year
2022
Assets
Cash 10
Receivables 27
Inventory 153

Total Assets 380
Liabilities
Accounts Payable 74

Equity
Capital Stock 70

+ Net Income 8
- Dividends 20
Sales 700
Gross Profit 181
Operating Income 21
Interest Expense 9
Net Income 8
Chapter 3
AA 3-2 How Does Wal-Mart (and Other Companies) Do It?
Discussion
Wal-Mart and other companies—whether large or small—use a systematic process referred to as the ac-
counting cycle to transform transaction data into summarized financial reports. The steps in the accounting
cycle include analyzing transactions, recording the effects of transactions, summarizing those effects, and
preparing financial statements and other reports for use by various internal and external users.
Wal-Mart applied the information technology to ease the labor demand in the process. The information
technology further helped Wal-Mart to analyze and identify the needs and buying behavior of its customers.
AA 3-3 Understanding the Mechanics of Accounting

Discussion
Jay McMahon should not be hired. He apparently has not understood which accounts have debit balances
and which have credit balances. He has not prepared a proper trial balance: the title is incorrect; the ac-
counts are not listed in logical order; and total debits do not equal total credits. A corrected trial balance is
as follows:
Rollins Engineering Company

Trial Balance
Debit Credit
Cash ....................................................................................................... $ 93,100
Accounts Receivable ............................................................................... 44,000
Supplies .................................................................................................. 11,000
Office Equipment ..................................................................................... 15,000
Accounts Payable .................................................................................... $ 5,500
Salaries Payable...................................................................................... 34,000
Capital Stock ........................................................................................... 76,000
Retained Earnings ................................................................................... 24,000
Consulting Revenues............................................................................... 280,000
Salaries Expense..................................................................................... 175,000
Utilities Expense ...................................................................................... 10,000
Rent Expense .......................................................................................... 32,000
Supplies Expense .................................................................................... 33,000
Other Expenses....................................................................................... 6,400
Totals ................................................................................................ $419,500 $419,500
The accounts are usually listed in the order they would appear on the balance sheet and statement of
comprehensive Income Total debits should equal total credits for all accounts.
Double-entry accounting is based on the basic accounting equation: Assets = Liabilities + Equity. Since the
equation is equality, it must always remain in balance. This means that for every transaction, there must be
equal debit and credit entries. Assets are increased by debits, while liabilities and equity are increased by
credits; this keeps the equation in balance. Since revenues increase equity, revenue accounts are also
increased by credits; expenses reduce equity and therefore are increased by debits, just like assets. Thus,
at any time under a double-entry system of accounting, it is possible to check the accounting records to
see that Assets = Liabilities + Equity, and that debits equal credits.
AA 3-4 You Decide: Is understanding the accounting cycle essential to being
a good accountant, or is it a waste of time?
Judgment Call
Issues to be discussed are:

1. Today, computer programs such as QuickBooks can perform the accounting cycle. All that is necessary
is to input the original data.
2. However, without understanding what the computer program is doing, it will never be possible to un-
derstand what is going on, where the risks are, and whether or not you can have confidence in the
output.
3. Because technology can perform most of the duties of the accounting cycle, it isn’t necessary to go into
as much detail in memorizing procedures and processes as it used to be. What is necessary now is a
general understanding of what the computer is doing and where it can go wrong.
4. The most important skills for today’s accountants are being able to interpret and use the output of the
accounting cycle to make better decisions.
AA 3-5 You Decide: If you major in accounting, will you enjoy a rewarding
career, or will the field be extinct in 20 years?
Judgment Call
Issues to be discussed are:

1. While the work of accountants might change, accountants will always be needed.
2. As computers become smarter and smarter, they will replace some of the duties of accountants, but
they can never use the output to make decisions as well as a human being can.
3. There will always be a need for accountants who can think analytically, communicate well, and partici-
pate in value-added decision making.
4. Accountants of the future will be more involved in interpreting financial information, planning, and un-
derstanding risks.
5. Today, more and more accountants are becoming part of top management teams because of the in-
creased importance of understanding financial information.
AA 3-6 TSMC
Real Company Analysis
1.
Research and Development Expense 91,418,746
General and Administrative Expense 21,737,210
Marketing Expense 6,348,626
Cash 119,504,582
2. TSMC didn’t issue bonds in 2019.
3.
Property, Plant, and Equipment 460,422,150
Cash 460,422,150
Chapter 3
AA 3-7 ASUSTek Computer Inc.

International
1.
Cash (Accounts Receivable) 351*
Revenue 351
Cost of sales 298

Cash (Accounts Payable) 298
*In billions of NTD.
2.
Payment Date
Cash Dividends Payable †
11,141
Cash 11,141
†
In millions of NTD.
Note: When ASUS declared cash dividends, the journal entries are:
Dividends (or Retained Earnings) 11,141

Cash Dividends Payable 11,141
AA 3-8 Shanghai Petrochemical Company Limited
International
1.
Cash (Accounts Receivable) 2,966*
Revenue 2,966
*In billions of RMB.
Cost of Sales †
2,488
Cash (Accounts Payable) 2,488
†
In millions of RMB.
2.
Payment Date
Cash Dividends Payable 46,008
Cash 46,008
AA 3-9 Should You Go the Extra Mile?
Ethics
Many people don’t view this situation as a question of ethics. They would contend that your employer is
paying you to take care of customers as they come into the store and that you have no further responsibility.
Others view this situation not as a question of ethics but as an opportunity to strengthen your résumé. If
you can get involved in an “information system redesign,” your prospects for improved employment in the
future will go up.
The ethical question is whether you owe your employer your best effort, including any ideas that will improve
operations. The answer isn’t a clear one. But what is certain is that your job will be much more interesting
and fulfilling if you are constantly trying to improve it.
Chapter 3
SOLUTIONS TO “STOP & THINK”
Stop & Think (p. 90): Why are dividends NOT considered to be an expense?
Dividends are distributions to owners and are not considered a cost of doing business. Taxes must be paid
(or the government gets upset) and interest must be paid (or creditors are distressed), but divid ends are
optional. If owners are concerned about dividends not being paid, they can sell their investment in the
company.

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CHAPTER 3

PE 3-1 (LO2) Impact of a Transaction

a., b., and c.

d. Total assets Increase by $200,000

PE 3-2 (LO2) Impact of a Transaction

a., b., and c.

d. Total assets Increase by $90,000, decrease by $90,000;

PE 3-3 (LO2) Impact of a Transaction

a., b., and c.

d. Total assets Decrease by $30,000

PE 3-4 (LO2) Impact of a Transaction

a., b., and c.

d. Total assets Increase by $180,000

PE 3-5 (LO2) Impact of a Transaction

a., b., and c.

d. Total assets Increase by $130,000

PE 3-6 (LO2) Computing Ending Account Balances

PE 3-7 (LO2) Understanding Debits

Account DEBIT Increases or Decreases?

PE 3-8 (LO2) Understanding Credits

Account CREDIT Increases or Decreases?

PE 3-9 (LO2) Understanding Debits, Credits, and Retained Earnings

PE 3-10 (LO2) Understanding Retained Earnings

PE 3-11 (LO3) Journal Entries

Cash .......................................................................................... 140,000

PE 3-12 (LO3) Journal Entries

Land .......................................................................................... 90,000

PE 3-13 (LO3) Journal Entries

Notes Payable .......................................................................... 30,000

PE 3-14 (LO3) Journal Entries

Cash .......................................................................................... 180,000

PE 3-15 (LO3) Journal Entries

Buildings .................................................................................. 210,000

PE 3-16 (LO3) Journal Entries with Revenues, Expenses, and Dividends

a. Equipment ........................................................................ 260,000

b. Cash .................................................................................. 200,000

c. Wages Expense ............................................................... 54,000

d. Advertising Expense ...................................................... 25,000

e. Cash .................................................................................. 50,000

g. Accounts Payable ........................................................... 110,000

h. Dividends ......................................................................... 17,000

PE 3-17 (LO4) Posting

PE 3-17 (LO4) (Continued)

Buildings Notes Payable

Mortgage Payable Capital Stock

PE 3-18 (LO4) Posting with Revenues, Expenses, and Dividends

Cash Accounts Receivable

Equipment Accounts Payable

Service Revenue Wages Expense

Advertising Expense Dividends

PE 3-19 (LO3) Preparing a Trial Balance

PE 3-20 (LO4) Using a Trial Balance to Prepare a Statement of Comprehensive

Service revenue ....................................................................... $400,000

PE 3-21 (LO4) Using a Trial Balance to Prepare a Balance Sheet

Capital stock .................................................................................................. 250,000

*Beginning retained earnings $0 + Net income $77,000 (see PE 3–20) –

PE 3-22 (LO4) Preparing a Statement of Cash Flows

Note: Dividend Payment is classified as a financing activity.

E 3-1 (LO2) Accounting Equation

Transaction Assets = Liabilities + Equity