Solution Manual + Answer Key

Solution Manual for Horngren's Accounting 12th Edition by Tracie

L. Miller Nobles,Brenda L. Mattison,Ella Mae Matsumura

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Book Title: Horngren's Accounting

Edition: 12th Edition

Author: Tracie L. Miller Nobles,Brenda L. Mattison,Ella Mae Matsumura

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Chapter 2
Recording Business Transactions
Review Questions
1. Identify the three categories of the accounting equation, and list at least four accounts associated
with each category.

The three categories of the accounting equation are assets, liabilities, and equity. Assets include
Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses, Land, Building, Equipment,
Furniture, and Fixtures. Liabilities include Accounts Payable, Notes Payable, Accrued Liability, and
Unearned Revenue. Equity includes Owner, Capital, Owner, Withdrawals, Revenue, and Expenses.

2. What is the purpose of the chart of accounts? Explain the numbering typically associated with the
accounts.

Companies need a way to organize their accounts so they use a chart of accounts. Accounts starting
with 1 are usually Assets, 2 – Liabilities, 3 – Equity, 4 – Revenues, and 5 – Expenses. The second
and third digits in account numbers indicate where the account fits within the category.

3. What does a ledger show? What’s the difference between a ledger and the chart of accounts?

A chart of accounts and a ledger are similar in that they both list the account names and account
numbers of the business. A ledger, though, provides more detail. It includes the increases and
decreases of each account for a specific period and the balance of each account at a specific point in
time.

4. Accounting uses a double-entry system. Explain what this sentence means.

With a double-entry you need to record the dual effects of each transaction. Every transaction affects
at least two accounts.

5. What is a T-account? On which side is the debit? On which side is the credit? Where does the
account name go on a T-account?

A T-account is a shortened form of each account in the ledger. The debit is on the left side, credit on
the right side, and the account name is shown on top.

6. When are debits increases? When are debits decreases?

Debits are increases for assets, withdrawals, and expenses. Debits are decreases for liabilities,
capital, and revenue.

7. When are credits increases? When are credits decreases?

© 2018 Pearson Education, Inc. 2-1

 Credits are increases for liabilities, capital, and revenue. Credits are decreases for assets,
withdrawals, and expenses.

8. Identify which types of accounts have a normal debit balance and which types of accounts have a
normal credit balance.

Assets, withdrawals, and expenses have a normal debit balance. Liabilities, capital, and revenue have
a normal credit balance.

9. What are source documents? Provide examples of source documents that a business might use.

Source documents provide the evidence and data for accounting transactions. Examples of source
documents a business would have are: bank deposit slips, purchase invoices, bank checks, and sales
invoices

10. Where are transactions initially recorded?

Transactions are first recorded in a journal, which is the record of transactions in date order.

11. Explain the five steps in journalizing and posting transactions.

Step 1: Identify the accounts and the account type. You need this information before you can
complete the next step. Step 2: Decide if each account increases or decreases, then apply the rules of
debits and credits. Reviewing the rules of debits and credits, we use the accounting equation to help
determine debits and credits for each account. Step 3: Record transactions in the journal using
journal entries. Step 4: Post the journal entry to the ledger. When journal entries are posted from the
journal to the ledger, the dollar amount is transferred from the debit and credit columns to the
specific accounts in the ledger. The date on the journal entry should also be transferred to the
accounts in the ledger. Step 5: Determine whether the accounting equation is in balance. After each
entry the accounting equation should always be in balance.

12. What are the four parts of a journal entry?

Part 1: Date of the transaction. Part 2: Debit account name and dollar amount. Part 3: Credit account
name and dollar amount. The credit account name is indented. Part 4: Brief explanation.

13. What is involved in the posting process?

When transactions are posted from the journal to the ledger, the dollar amount is transferred from the
debit and credit columns to the specific accounts in the ledger. The date of the journal entry is also
transferred to the accounts in the ledger. The posting reference columns in the journal and ledger are
also completed. In a computerized system, this step is completed automatically when the transaction
is recorded in the journal.

14. What is the purpose of the trial balance?

The trial balance is used to prove the equality of total debits and total credits of all accounts in the
ledger; it is also used to prepare the financial statements.

© 2018 Pearson Education, Inc. 2-2

15. What is the difference between the trial balance and the balance sheet?

A trial balance verifies the equality of total debits and total credits of all accounts on the trial balance
and is an internal document used only by employees of the company. The balance sheet, on the other
hand, presents the business’s accounting equation and is a financial statement that can be used by
both internal and external users.

16. If total debits equal total credits on the trial balance, is the trial balance error-free? Explain your
answer.

If total debits equal total credits on the trial balance, it does not mean that the trial balance is error-
free. An incorrect amount could have been used, an entry could have been completely missed, or the
wrong account title could have been debited or credited.

17. What is the calculation for the debt ratio? Explain what the debt ratio evaluates.

The debt ratio is calculated by dividing total liabilities by total assets and shows the proportion of
assets financed with debt. It can be used to evaluate a business’s ability to pay its debts.

© 2018 Pearson Education, Inc. 2-3

Short Exercises
S2-1 Identifying accounts

Learning Objective 1

Consider the following accounts and identify each account as an asset (A), liability (L), or equity (E).
a. Notes Receivable
b. Nunez, Capital
c. Prepaid Insurance
d. Notes Payable
e. Rent Revenue
f. Taxes Payable
g. Rent Expense
h. Furniture
i. Nunez, Withdrawals
j. Unearned Revenue

SOLUTION

a. Notes Receivable (A) f. Taxes Payable (L)

b. Nunez, Capital (E) g. Rent Expense (E)
c. Prepaid Insurance (A) h. Furniture (A)
d. Notes Payable (L) i. Nunez, Withdrawals (E)
e. Rent Revenue (E) j. Unearned Revenue (L)

S2-2 Identifying increases and decreases in accounts

Learning Objective 2

For each account, identify whether the changes would be recorded as a debit (DR) or credit (CR).
a. Increase to Accounts Receivable
b. Decrease to Unearned Revenue
c. Decrease to Cash
d. Increase to Interest Expense
e. Increase to Salaries Payable
f. Decrease to Prepaid Rent
g. Increase to Proudfoot, Capital
h. Increase to Notes Receivable
i. Decrease to Accounts Payable
j. Increase to Interest Revenue

SOLUTION

a. Increase to Accounts Receivable (DR) f. Decrease to Prepaid Rent (CR)

b. Decrease to Unearned Revenue (DR) g. Increase to Proudfoot, Capital (CR)
c. Decrease to Cash (CR) h. Increase to Notes Receivable (DR)
d. Increase to Interest Expense (DR) i. Decrease to Accounts Payable (DR)
e. Increase to Salaries Payable (CR) j. Increase to Interest Revenue (CR)

© 2018 Pearson Education, Inc. 2-4

S2-3 Identifying normal balances

Learning Objective 2

For each account, identify whether the normal balance is a debit (DR) or credit (CR).
a. Notes Payable
b. Herman, Withdrawals
c. Service Revenue
d. Land
e. Unearned Revenue
f. Herman, Capital
g. Utilities Expense
h. Office Supplies
i. Advertising Expense
j. Interest Payable

SOLUTION

a. Notes Payable (CR) f. Herman, Capital (CR)

b. Herman, Withdrawals (DR) g. Utilities Expense (DR)
c. Service Revenue (CR) h. Office Supplies (DR)
d. Land (DR) i. Advertising Expense (DR)
e. Unearned Revenue (CR) j. Interest Payable (CR)

S2-4 Calculating the balance of a T-account

Learning Objective 2

Calculate the Accounts Payable balance.

SOLUTION

Accounts Payable
May 2 6,000 21,000 May 1
May 22 11,500 500 May 5
8,500 May 15
500 May 23
13,000 Bal.

© 2018 Pearson Education, Inc. 2-5

S2-5 Journalizing transactions

Learning Objective 3

John Daniel opened a medical practice in Sacramento, California, and had the following transactions
during the month of January.

Jan. 1 The business received $34,000 cash and gave capital to Daniel.
2 Purchased medical supplies on account, $17,000.
4 Performed services for patients receiving $1,600.
12 Paid monthly office rent of $3,000.
15 Recorded $7,000 revenue for services rendered to patients on account.

Journalize the transactions of John Daniel, M.D. Include an explanation with each entry.

SOLUTION

Date Accounts and Explanation Debit Credit

Jan. 1 Cash 34,000
Daniel, Capital 34,000
Owner contribution.

2 Medical Supplies 17,000

Accounts Payable 17,000
Purchased medical supplies on account.

4 Cash 1,600
Service Revenue 1,600
Performed services for patients.

12 Rent Expense 3,000

Cash 3,000
Paid rent with cash.

15 Accounts Receivable 7,000

Service Revenue 7,000
Performed services for patients on account.

© 2018 Pearson Education, Inc. 2-6

S2-6 Journalizing transactions

Learning Objective 3

Harper Sales Consultants completed the following transactions during the latter part of January:

Jan. 22 Performed services for customers on account, $7,500.

30 Received cash on account from customers, $8,000.
31 Received a utility bill, $220, which will be paid during February.
31 Paid monthly salary to salesman, $2,500.
31 Received $2,310 for three months of consulting service to be performed
starting in February.
31 The owner, Damon Harper, withdrew $950 from the business.

Journalize the transactions of Harper Sales Consultants. Include an explanation with each journal entry.

SOLUTION

Date Accounts and Explanation Debit Credit

Jan. 22 Accounts Receivable 7,500
Service Revenue 7,500
Performed services for customers on account.

30 Cash 8,000
Accounts Receivable 8,000
Received cash on account from customers.

31 Utilities Expense 220

Utilities Payable 220
Received a utility bill due in February.

31 Salaries Expense 2,500

Cash 2,500
Paid monthly salary to salesman.

31 Cash 2,310
Unearned Revenue 2,310
Received cash for 3 months consulting services in
advance.

31 Harper, Withdrawals 950

Cash 950
Owner withdrawal.

© 2018 Pearson Education, Inc. 2-7

S2-7 Journalizing transactions and posting to T-accounts

Learning Objective 3

Roland Foster Optical Dispensary completed the following transactions during the latter part of March:

Mar. 15 Purchased office supplies on account, $3,400.

28 Paid $1,800 on account.

Requirements
1. Journalize the transactions of Roland Foster Optical Dispensary. Include an explanation with
each journal entry.
2. Open the following accounts (use T-account format): Cash (Beginning Balance of $21,000),
Office Supplies, and Accounts Payable. Post the journal entries from Requirement 1 to the
accounts, and compute the balance in each account.

SOLUTION

Requirement 1

Date Accounts and Explanation Debit Credit

Mar. 15 Office Supplies 3,400
Accounts Payable 3,400
Purchased office supplies on account.

28 Accounts Payable 1,800

Cash 1,800
Paid cash on account.

Requirement 2

Cash Accounts Payable

Bal. 21,000 1,800 Mar. 28 Mar. 28 1,800 3,400 Mar. 15
Bal. 19,200 1,600 Bal.

Office Supplies
Mar. 15 3,400
Bal. 3,400

© 2018 Pearson Education, Inc. 2-8

S2-8 Preparing a trial balance

Learning Objective 4

Smithson Floor Coverings reported the following summarized data at December 31, 2018. Accounts
appear in no particular order, and all have normal balances.

Service Revenue $ 26,000 Salaries Payable $ 25,000

Equipment 36,000 Salaries Expense 1,600
Rent Expense 17,000 Cash 7,000
Smithson, Capital 24,000 Accounts Receivable 3,600
Accounts Payable 2,200 Interest Payable 6,000
Smithson, Withdrawals 16,100 Utilities Expense 1,900

Prepare the trial balance of Smithson Floor Coverings at December 31, 2018.

SOLUTION

SMITHSON FLOOR COVERINGS

Trial Balance
December 31, 2018

Account Title Balance

Debit Credit
Cash $ 7,000
Accounts Receivable 3,600
Equipment 36,000
Accounts Payable $ 2,200
Salaries Payable 25,000
Interest Payable 6,000
Smithson, Capital 24,000
Smithson, Withdrawals 16,100
Service Revenue 26,000
Rent Expense 17,000
Salaries Expense 1,600
Utilities Expense 1,900
Total $ 83,200 $ 83,200

© 2018 Pearson Education, Inc. 2-9

S2-9 Calculating debt ratio

Learning Objective 5

Aladdin Carpet Care had the following total assets, liabilities, and equity as of October 31:

Assets $ 200,000
Liabilities 30,000
Equity 170,000

What is Aladdin Carpet Care’s debt ratio as of October 31?

SOLUTION

Debt ratio = Total liabilities / Total assets = $30,000 / $200,000 = 0.15 = 15%

© 2018 Pearson Education, Inc. 2-10

Exercises
E2-10 Using accounting vocabulary

Learning Objectives 1, 2, 3, 4

Match the accounting terms with the corresponding definitions.

1. Posting a. A detailed record of all increases and decreases that have

2. Account occurred in a particular asset, liability, or equity during a
3. Debit period
4. Journal b. The record holding all the accounts of a business, the
5. Chart of accounts changes in those accounts, and their balances
6. Trial balance c. A journal entry that is characterized by having multiple
7. Normal balance debits and/or multiple credits
8. Ledger d. A record of transactions in date order
9. Credit e. Left side of a T-account
10. Compound journal entry f. Side of an account where increases are recorded
g. Transferring amounts from the journal to the ledger
h. Right side of a T-account
i. A list of all accounts with their balances at a point in time
j. A list of all accounts with their account numbers

SOLUTION

1. g
2. a
3. e
4. d
5. j
6. i
7. f
8. b
9. h
10. c

© 2018 Pearson Education, Inc. 2-11

E2-11 Creating a chart of accounts

Raymond Autobody Shop has the following accounts:

Accounts Payable Service Revenue

Cash Equipment
Utilities Expense Raymond, Capital
Automotive Supplies Advertising Expense
Raymond, Withdrawals Unearned Revenue

Create a chart of accounts for Raymond Autobody Shop using the standard numbering system. Each
account is separated by a factor of 10. For example, the first asset account will be 100 and the next asset
account will 110.

SOLUTION

Assets Equity
100 – Cash 300 – Raymond, Capital
110 – Automotive Supplies 310 – Raymond, Withdrawals
120 – Equipment
Revenues
Liabilities 400 – Service Revenue
200 – Accounts Payable
210 – Unearned Revenue Expenses
500 – Utilities Expense
510 – Advertising Expense

© 2018 Pearson Education, Inc. 2-12

E2-12 Identifying accounts, increases in accounts, and normal balances

Learning Objectives 1, 2

a. Interest Revenue
b. Accounts Payable
c. Calhoun, Capital
d. Office Supplies
e. Advertising Expense
f. Unearned Revenue
g. Prepaid Rent
h. Utilities Expense
i. Calhoun, Withdrawals
j. Service Revenue

Requirements
1. Identify each account as asset (A), liability (L), or equity (E).
2. Identify whether the account is increased with a debit (DR) or credit (CR).
3. Identify whether the normal balance is a debit (DR) or credit (CR).

SOLUTION

Requirement 1 Requirement 2 Requirement 3

Normal
Increase with
Account Name Type of Account Balance
Debit/Credit
Debit/Credit
a. Interest Revenue E CR CR
b. Accounts Payable L CR CR
c. Calhoun, Capital E CR CR
d. Office Supplies A DR DR
e. Advertising Expense E DR DR
f. Unearned Revenue L CR CR
g. Prepaid Rent A DR DR
h. Utilities Expense E DR DR
i. Calhoun, Withdrawals E DR DR
j. Service Revenue E CR CR

© 2018 Pearson Education, Inc. 2-13

 E2-13 Identifying increases and decreases in accounts and normal balances
Learning Objective 2
Insert the missing information into the accounting equation. Signify increases as Incr. and decreases as Decr.

SOLUTION
(a) Assets = Liabilities + (b) Equity

(d) Owner,
Assets = (c) Liabilities + Owner, Capital – Withdrawals + Revenues – Expenses
(e) Incr. Decr. Decr. (f) Incr. (g) Decr. (h) Incr. (i) Incr. (j) Decr. (k) Decr. (l) Incr. Incr. (m) Decr.

Debit (n) Credit (o) Debit Credit (p) Debit Credit (q) Debit Credit Debit Credit (r) Debit Credit

(a) Assets
(b) Equity
(c) Liabilities
(d) Owner, Withdrawals
(e) Incr.
(f) Incr.
(g) Decr.
(h) Incr.
(i) Incr.
(j) Decr.
(k) Decr.
(l) Incr.
(m) Decr.
(n) Credit
(o) Debit
(p) Debit
(q) Debit
(r) Debit
© 2018 Pearson Education, Inc. 2-14
E2-14 Identifying source documents

Learning Objective 3

a. For each transaction, identify a possible source document.

b. The business received $20,000 cash and gave capital to the owner.
c. Purchased office supplies on account, $500.
d. Recorded $1,000 revenue for services rendered to customers.

SOLUTION

a. Bank deposit slip

b. Purchase invoice
c. Sales invoice

E2-15 Analyzing and journalizing transactions

Learning Objective 3

As the manager of Margarita Mexican Restaurant, you must deal with a variety of business transactions.
Provide an explanation for the following transactions:
a. Debit Equipment and credit Cash.
b. Debit Garcia, Withdrawals and credit Cash.
c. Debit Wages Payable and credit Cash.
d. Debit Equipment and credit Garcia, Capital.
e. Debit Cash and credit Unearned Revenue.
f. Debit Advertising Expense and credit Cash.
g. Debit Cash and credit Service Revenue.

Use the following information to answer Exercises E2-16 and E2-17.

The following transactions occurred for Lawrence Engineering:

Jul. 2 Received $14,000 contribution from Brett Lawrence, owner, in exchange

for capital.
4 Paid utilities expense of $370.
5 Purchased equipment on account, $1,600.
10 Performed services for a client on account, $2,900.
12 Borrowed $7,100 cash, signing a notes payable.
19 The owner, Brett Lawrence, withdrew $200 cash from the business.
21 Purchased office supplies for $840 and paid cash.
27 Paid the liability from July 5.

© 2018 Pearson Education, Inc. 2-15

SOLUTION

a. Purchased equipment with cash.

b. Owner withdrew cash.
c. Paid wages owed to employees, previously recorded.
d. Received equipment for the business in exchange for owner’s capital.
e. Received cash from customer for work to be completed in the future.
f. Paid for advertising with cash.
g. Performed services that were paid by the customer.

E2-16 Analyzing and journalizing transactions

Learning Objective 3

Journalize the transactions of Lawrence Engineering. Include an explanation with each journal entry.
Use the following accounts: Cash; Accounts Receivable; Office Supplies; Equipment; Accounts
Payable; Notes Payable; Lawrence, Capital; Lawrence, Withdrawals; Service Revenue; and Utilities
Expense.

SOLUTION

Date Accounts and Explanation Debit Credit

Jul. 2 Cash 14,000
Lawrence, Capital 14,000
Owner contribution.

4 Utilities Expense 370

Cash 370
Paid utility expense.

5 Equipment 1,600
Accounts Payable 1,600
Purchased equipment on account.

10 Accounts Receivable 2,900

Service Revenue 2,900
Performed services for client on account.

12 Cash 7,100
Notes Payable 7,100
Borrowed cash by signing note.

19 Lawrence, Withdrawals 200

Cash 200
Owner withdrawal.

© 2018 Pearson Education, Inc. 2-16

E2-16, cont.

21 Office Supplies 840

Cash 840
Purchased office supplies with cash.

27 Accounts Payable 1,600

Cash 1,600
Paid cash on account.

E2-17 Posting journal entries to T-accounts

Learning Objective 3

3. Cash Balance $18,090

Requirements
1. Open the following T-accounts for Lawrence Engineering: Cash; Accounts Receivable; Office
Supplies; Equipment; Accounts Payable; Notes Payable; Lawrence, Capital; Lawrence,
Withdrawals; Service Revenue; and Utilities Expense.
2. Post the journal entries to the T-accounts. Also transfer the dates to the T-accounts.
3. Compute the July 31 balance for each account.

Use the following information to answer Exercises E2-18 and E2-19.

The following transactions occurred for Wilke Technology Solutions:

May 1 The business received cash of $105,000 and gave capital to Zoe Wilke.
2 Purchased office supplies on account, $550.
4 Paid $57,000 cash for building and land. The building had a fair market
value of $45,000.
6 Performed services for customers and received cash, $3,600.
9 Paid $350 on accounts payable.
17 Performed services for customers on account, $3,500.
19 Paid rent expense for the month, $1,200.
20 Received $1,500 from customers for services to be performed next month.
21 Paid $900 for advertising in next month’s IT Technology magazine.
23 Received $3,100 cash on account from a customer.
31 Incurred and paid salaries, $1,700.

© 2018 Pearson Education, Inc. 2-17

SOLUTION

Requirements 1, 2, and 3

Cash Accounts Payable

Jul. 2 14,000 370 Jul. 4 Jul. 27 1,600 1,600 Jul. 5
Jul. 12 7,100 200 Jul. 19 0 Balance
840 Jul. 21
1,600 Jul. 27
Balance 18,090

Accounts Receivable Notes Payable

Jul. 10 2,900 7,100 Jul. 12
Balance 2,900 7,100 Balance

Office Supplies Lawrence, Capital

Jul. 21 840 14,000 Jul. 2
Balance 840 14,000 Balance

Equipment Lawrence, Withdrawals

Jul. 5 1,600 Jul. 19 200
Balance 1,600 Balance 200

Service Revenue
2,900 Jul. 10
2,900 Balance

Utilities Expense
Jul. 4 370
Balance 370

© 2018 Pearson Education, Inc. 2-18

E2-18 Analyzing and journalizing transactions

Learning Objective 3

Journalize the transactions of Wilke Technology Solutions. Include an explanation with each journal
entry. Use the following accounts: Cash; Accounts Receivable; Office Supplies; Prepaid Advertising;
Land; Building; Accounts Payable; Unearned Revenue; Wilke, Capital; Service Revenue; Rent Expense;
and Salaries Expense.

SOLUTION

Post.
Date Accounts and Explanation Ref. Debit Credit
May 1 Cash 105,000
Wilke, Capital 105,000
Owner contribution

2 Office Supplies 550

Accounts Payable 550
Purchased office supplies on account.

4 Building 45,000
Land 12,000
Cash 57,000
Purchased building and land for cash.

6 Cash 3,600
Service Revenue 3,600
Performed services for customers for
cash.

9 Accounts Payable 350

Cash 350
Paid cash on account.

17 Accounts Receivable 3,500

Service Revenue 3,500
Performed services for customers on
account.

19 Rent Expense 1,200

Cash 1,200
Paid rent for the month.

20 Cash 1,500
Unearned Revenue 1,500
Received cash from customers for
services to be performed next month.

© 2018 Pearson Education, Inc. 2-19

E2-18, cont.

21 Prepaid Advertising 900

Cash 900
Paid for next month’s advertising.

23 Cash 3,100
Accounts Receivable 3,100
Received cash on account from
customer.

31 Salaries Expense 1,700

Cash 1,700
Paid salaries.

E2-19 Posting journal entries to four-column accounts

Learning Objective 3

2. Cash Balance $52,050

Requirements
1. Open four-column accounts using the following account numbers: Cash, 110; Accounts
Receivable, 120; Office Supplies, 130; Prepaid Advertising, 140; Land, 150; Building, 160;
Accounts Payable, 210; Unearned Revenue, 220; Wilke, Capital, 310; Service Revenue, 410; Rent
Expense, 510; and Salaries Expense, 520.
2. Post the journal entries to the four-column accounts, and determine the balance in the account
after each transaction. Assume that the journal entries were recorded on page 10 of the journal. Make
sure to complete the Post. Ref. columns in the journal and ledger.

© 2018 Pearson Education, Inc. 2-20

SOLUTION

Requirement 2

Post.
Date Accounts and Explanation Ref. Debit Credit
May 1 Cash 110 105,000
Wilke, Capital 310 105,000
Owner contribution.

2 Office Supplies 130 550

Accounts Payable 210 550
Purchased office supplies on account.

4 Building 160 45,000

Land 150 12,000
Cash 110 57,000
Purchased building and land for cash.

6 Cash 110 3,600

Service Revenue 410 3,600
Performed services for customers for
cash.

9 Accounts Payable 210 350

Cash 110 350
Paid cash on account.

17 Accounts Receivable 120 3,500

Service Revenue 410 3,500
Performed services for customers on
account.

© 2018 Pearson Education, Inc. 2-21

E2-19, cont.

19 Rent Expense 510 1,200

Cash 110 1,200
Paid rent for the month.

20 Cash 110 1,500

Unearned Revenue 220 1,500
Received cash from customers for
services to be performed next month.

21 Prepaid Advertising 140 900

Cash 110 900
Paid for next month’s advertising.

23 Cash 110 3,100

Accounts Receivable 120 3,100
Received cash on account from
customer.

31 Salaries Expense 520 1,700

Cash 110 1,700
Paid salaries.

Requirements 1 and 2

CASH Account No. 110

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 1 J10 105,000 105,000
May 4 J10 57,000 48,000
May 6 J10 3,600 51,600
May 9 J10 350 51,250
May 19 J10 1,200 50,050
May 20 J10 1,500 51,550
May 21 J10 900 50,650
May 23 J10 3,100 53,750
May 31 J10 1,700 52,050

ACCOUNTS RECEIVABLE Account No. 120

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 17 J10 3,500 3,500
May 23 J10 3,100 400

© 2018 Pearson Education, Inc. 2-22

E2-19, cont.

OFFICE SUPPLIES Account No. 130

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 2 J10 550 550

PREPAID ADVERTISING Account No. 140

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 21 J10 900 900

LAND Account No. 150

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 4 J10 12,000 12,000

BUILDING Account No. 160

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 4 J10 45,000 45,000

ACCOUNTS PAYABLE Account No. 210

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 2 J10 550 550
May 9 J10 350 200

UNEARNED REVENUE Account No. 220

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 20 J10 1,500 1,500

WILKE, CAPITAL Account No. 310

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 1 J10 105,000 105,000

© 2018 Pearson Education, Inc. 2-23

E2-19, cont.

SERVICE REVENUE Account No. 410

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 6 J10 3,600 3,600
May 17 J10 3,500 7,100

RENT EXPENSE Account No. 510

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 19 J10 1,200 1,200

SALARIES EXPENSE Account No. 520

Balance
Date Item Post Ref. Debit Credit Debit Credit
May 31 J10 1,700 1,700

E2-20 Analyzing transactions from T-accounts

Learning Objective 3

The first nine transactions of North-West Airplane Repair have been posted to the T-accounts. Provide
an explanation for each of the nine transactions

SOLUTION

1. The business received cash of $370,000 and gave capital to owner.

2. Paid $360,000 cash for a building.
3. Borrowed $260,000 cash, signing a note payable.
4. Purchased office supplies on account, $1,500.
5. Paid $1,200 on accounts payable.
6. Paid property tax expense, $1,500.
7. Paid rent $1,400 and salaries $2,500.
8. Owner withdrew $7,000.

© 2018 Pearson Education, Inc. 2-24

 9. Performed services for customers and received cash, $21,000.

E2-21 Journalizing transactions from T-accounts

Learning Objective 3

In December 2018, the first five transactions of Abling’s Lawn Care Company have been posted to the
T-accounts. Prepare the journal entries that served as the sources for the five transactions. Include an
explanation for each entry.

SOLUTION

Posting
Date Accounts and Explanation Ref. Debit Credit
1. Cash 57,000
Abling, Capital 57,000
Owner contribution.

2. Office Supplies 800

Accounts Payable 800
Purchased office supplies on account.

3. Building 40,000
Cash 40,000
Purchased building for cash.

4. Cash 46,000
Notes Payable 46,000
Borrowed money signing a note payable.

5. Equipment 3,800
Cash 3,800
Purchased equipment for cash.

© 2018 Pearson Education, Inc. 2-25

E2-22 Preparing a trial balance

Learning Objective 4

Total Debits $191,800

The accounts of Anderson Moving Company follow with their normal balances as of August 31, 2018.
The accounts are listed in no particular order.

Anderson, Capital $ 49,800 Trucks $ 123,000

Insurance Expense 600 Fuel Expense 1,000
Accounts Payable 4,000 Anderson, Withdrawals 5,600
Service Revenue 82,000 Utilities Expense 300
Building 41,000 Accounts Receivable 10,000
Advertising Expense 200 Notes Payable 56,000
Salaries Expense 6,000 Office Supplies 100
Cash 4,000

Prepare Anderson’s trial balance as of August 31, 2018.

SOLUTION

ANDERSON MOVING COMPANY

Trial Balance
August 31, 2018

Account Title Balance

Debit Credit
Cash $ 4,000
Accounts Receivable 10,000
Office Supplies 100
Building 41,000
Trucks 123,000
Accounts Payable $ 4,000
Notes Payable 56,000
Anderson, Capital 49,800
Anderson, Withdrawals 5,600
Service Revenue 82,000
Salaries Expense 6,000
Fuel Expense 1,000
Insurance Expense 600
Utilities Expense 300
Advertising Expense 200
Total $ 191,800 $ 191,800

© 2018 Pearson Education, Inc. 2-26

E2-23 Preparing a trial balance from T-accounts

Learning Objective 4

Total Debits $80,700

The T-accounts of McMahon Farm Equipment Repair follow as of May 31, 2018.

Prepare McMahon Farm Equipment Repair’s trial balance as of May 31, 2018.

SOLUTION

MCMAHON FARM EQUIPMENT REPAIR

Trial Balance
May 31, 2018

Account Title Balance

Debit Credit
Cash $ 9,020
Accounts Receivable 3,100
Land 14,000
Building 29,000
Equipment 16,000
Salaries Payable $ 3,400
Notes Payable 25,000
McMahon, Capital 47,000
McMahon, Withdrawals 2,000
Service Revenue 5,300
Salaries Expense 6,300
Property Tax Expense 1,000
Advertising Expense 280
Total $ 80,700 $ 80,700

© 2018 Pearson Education, Inc. 2-27

E2-24 Journalizing transactions, posting journal entries to four-column accounts, and preparing a
trial balance
Learning Objectives 3, 4
3. Total Debits $24,670

The following transactions occurred during the month for Teresa Parker, CPA:

Jun. 1 Parker opened an accounting firm by contributing $13,200 cash and office
furniture with a fair market value of $5,300 in exchange for capital.
5 Paid monthly rent of $1,300.
9 Purchased office supplies on account, $600.
14 Paid employee’s salary, $1,900.
18 Received a bill for utilities to be paid next month, $370.
21 Paid $500 of the accounts payable created on June 9.
25 Performed accounting services on account, $5,700.
28 Parker withdrew cash of $6,700.

Requirements
1. Open the following four-column accounts of Teresa Parker, CPA: Cash, 110; Accounts
Receivable, 120; Office Supplies, 130; Office Furniture, 140; Accounts Payable, 210; Utilities
Payable, 220; Parker, Capital, 310; Parker, Withdrawals, 320; Service Revenue, 410; Salaries
Expense, 510; Rent Expense, 520; and Utilities Expense, 530.
2. Journalize the transactions, and then post the journal entries to the four-column accounts.
Explanations are not required for the journal entries. Keep a running balance in each account.
Assume the journal entries are recorded on page 10 of the journal.
3. Prepare the trial balance as of June 30, 2018.

SOLUTION

Requirement 2

Post
Date Accounts and Explanation Ref. Debit Credit
June 1 Cash 110 13,200
Office Furniture 140 5,300
Parker, Capital 310 18,500

5 Rent Expense 520 1,300

Cash 110 1,300

9 Office Supplies 130 600

Accounts Payable 210 600

14 Salaries Expense 510 1,900

Cash 110 1,900

© 2018 Pearson Education, Inc. 2-28

E2-24, cont.

18 Utilities Expense 530 370

Utilities Payable 220 370

21 Accounts Payable 210 500

Cash 110 500

25 Accounts Receivable 120 5,700

Service Revenue 410 5,700

28 Parker, Withdrawals 320 6,700

Cash 110 6,700

Requirements 1 & 2

CASH Account No. 110

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 1 J10 13,200 13,200
June 5 J10 1,300 11,900
June 14 J10 1,900 10,000
June 21 J10 500 9,500
June 28 J10 6,700 2,800

ACCOUNTS RECEIVABLE Account No. 120

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 25 J10 5,700 5,700

OFFICE SUPPLIES Account No. 130

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 9 J10 600 600

OFFICE FURNITURE Account No. 140

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 1 J10 5,300 5,300

© 2018 Pearson Education, Inc. 2-29

E2-24, cont.

ACCOUNTS PAYABLE Account No. 210

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 9 J10 600 600
June 21 J10 500 100

UTILITIES PAYABLE Account No. 220

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 18 J10 370 370

PARKER, CAPITAL Account No. 310

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 1 J10 18,500 18,500

PARKER, WITHDRAWALS Account No. 320

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 28 J10 6,700 6,700

SERVICE REVENUE Account No. 410

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 25 J10 5,700 5,700

SALARIES EXPENSE Account No. 510

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 14 J10 1,900 1,900

© 2018 Pearson Education, Inc. 2-30

E2-24, cont.
Account No. 520
RENT EXPENSE
Balance
Date Item Post Ref. Debit Credit Debit Credit
June 5 J10 1,300 1,300

UTILITIES EXPENSE Account No. 530

Balance
Date Item Post Ref. Debit Credit Debit Credit
June 18 J10 370 370

Requirement 3

TERESA PARKER, CPA

Trial Balance
June 30, 2018

Acct. No. Account Title Balance

Debit Credit
110 Cash $ 2,800
120 Accounts Receivable 5,700
130 Office Supplies 600
140 Office Furniture 5,300
210 Accounts Payable $ 100
220 Utilities Payable 370
310 Parker, Capital 18,500
320 Parker, Withdrawals 6,700
410 Service Revenue 5,700
510 Salaries Expense 1,900
520 Rent Expense 1,300
530 Utilities Expense 370
Total $ 24,670 $ 24,670

© 2018 Pearson Education, Inc. 2-31

E2-25 Analyzing accounting errors

Learning Objectives 4

Courtney Meehan has trouble keeping her debits and credits equal. During a recent month, Courtney
made the following accounting errors:
a. In preparing the trial balance, Courtney omitted a $5,000 Notes Payable. The debit to Cash was
correct.
b. Courtney posted a $1,000 Utilities Expense as $100. The credit to Cash was correct.
c. In recording a $600 payment on account, Courtney debited Furniture instead of Accounts
Payable.
d. In journalizing a receipt of cash for service revenue, Courtney debited Cash for $50 instead of
the correct amount of $500. The credit was correct.
e. Courtney recorded a $210 purchase of office supplies on account by debiting Office Supplies for
$120 and crediting Accounts Payable for $120.

Requirements
1. For each of these errors, state whether total debits equal total credits on the trial balance.
2. Identify each account that has an incorrect balance and the amount and direction of the error
(e.g., “Accounts Receivable $500 too high”).

SOLUTION

Requirements 1 and 2
Debits equal Credits,
Yes or No Accounts Amount High or Low
a. No Notes Payable $5,000 Low
b. No Utilities Expense 900 Low
c. Yes Furniture 600 High
Accounts Payable 600 High
d. No Cash 450 Low
e. Yes Office Supplies 90 Low
Accounts Payable 90 Low

E2-26 Correcting errors in a trial balance

Learning Objective 4

Total Debits $35,600

The accountant for Countryside Painting Specialists is having a hard time preparing the trial balance as
of November 30, 2018:

© 2018 Pearson Education, Inc. 2-32

Prepare the corrected trial balance as of November 30, 2018. Assume all amounts are correct and all
accounts have normal balances.

SOLUTION

COUNTRYSIDE PAINTING SPECIALISTS

Trial Balance
November 30, 2018

Account Title Balance

Debit Credit
Cash $ 12,100
Accounts Receivable 1,300
Office Supplies 200
Painting Equipment 13,500
Accounts Payable $ 3,300
Unearned Revenue 1,700
Watts, Capital 15,000
Watts, Withdrawals 3,500
Service Revenue 15,600
Advertising Expense 550
Rent Expense 1,800
Salaries Expense 2,400
Utilities Expense 250
Total $ 35,600 $ 35,600

© 2018 Pearson Education, Inc. 2-33

E2-27 Correcting errors in a trial balance

Learning Objective 4

Total Debits $35,300

The following trial balance of Joy McDowell Tutoring Service as of May 31, 2018, does not balance.

Investigation of the accounting records reveals that the bookkeeper:

a. Recorded a $400 cash revenue transaction by debiting Accounts Receivable. The credit entry
was correct.
b. Posted a $2,000 credit to Accounts Payable as $200.
c. Did not record Utilities Expense or the related Utilities Payable in the amount of $300.
d. Understated McDowell, Capital by $100.

Prepare the corrected trial balance as of May 31, 2018, complete with a heading; journal entries are not
required.

© 2018 Pearson Education, Inc. 2-34

SOLUTION

JOY MCDOWELL TUTORING SERVICE

Trial Balance
May 31, 2018

Account Title Balance

Debit Credit
Cash $ 3,200
Accounts Receivable 1,600
Office Supplies 600
Computer Equipment 15,800
Accounts Payable $ 12,900
Utilities Payable 1,100
McDowell, Capital 11,700
McDowell, Withdrawals 10,400
Service Revenue 9,600
Salaries Expense 1,900
Rent Expense 800
Utilities Expense 1,000
Total $ 35,300 $ 35,300

Explanation:

a. Increase Cash by $400, decrease Accounts Receivable by $400.

b. Increase Accounts Payable by $1,800 ($2,000 – $200).

c. Increase Utilities Expense and Utilities Payable by $300 each.

d. Increase McDowell, Capital by $100.

© 2018 Pearson Education, Inc. 2-35

E2-28 Calculating the debt ratio

Learning Objective 5

Total Assets $174,900

John Hart, M.D., reported the following trial balance as of September 30, 2018:

Calculate the debt ratio for John Hart, M.D.

© 2018 Pearson Education, Inc. 2-36

SOLUTION

Liabilities:
Accounts Payable $ 1,600
Utilities Payable 800
Unearned Revenue 24,795
Notes Payable 69,000
Total liabilities $ 96,195

Assets:
Cash $ 30,000
Accounts Receivable 7,900
Office Supplies 3,000
Office Equipment 30,000
Building 75,000
Land 29,000
Total assets $ 174,900

Debt ratio = Total liabilities / Total assets = $96,195 / $174,900 = 0.55 = 55%

© 2018 Pearson Education, Inc. 2-37

Problems (Group A)
P2-29A Journalizing transactions, posting journal entries to T-accounts, and preparing a trial
balance

Learning Objectives 3, 4

2. Cash Balance $56,050

Vince York practices medicine under the business title Vince York, M.D. During July, the medical
practice completed the following transactions:

Jul. 1 York contributed $63,000 cash to the business in exchange for capital.
5 Paid monthly rent on medical equipment, $510.
9 Paid $23,000 cash to purchase land to be used in operations.
10 Purchased office supplies on account, $1,600.
19 Borrowed $22,000 from the bank for business use.
22 Paid $1,100 on account.
28 The business received a bill for advertising in the daily newspaper to be
paid in August, $240.
31 Revenues earned during the month included $6,400 cash and $6,000 on
account.
31 Paid employees’ salaries $2,200, office rent $1,900, and utilities $560.
Record as a compound entry.
31 The business received $1,120 for medical screening services to be
performed next month.
31 York withdrew cash of $7,200.

The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Land; Accounts
Payable; Advertising Payable; Unearned Revenue; Notes Payable; York, Capital; York, Withdrawals;
Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; and Advertising Expense.

Requirements
1. Journalize each transaction. Explanations are not required.
2. Post the journal entries to the T-accounts, using transaction dates as posting references in the
ledger accounts. Label the balance of each account Bal.
3. Prepare the trial balance of Vince York, M.D., as of July 31, 2018.

© 2018 Pearson Education, Inc. 2-38

SOLUTION

Requirement 1
Post
Date Accounts and Explanation Ref. Debit Credit
July 1 Cash 63,000
York, Capital 63,000

5 Rent Expense 510

Cash 510

9 Land 23,000
Cash 23,000

10 Office Supplies 1,600

Accounts Payable 1,600

19 Cash 22,000
Notes Payable 22,000

22 Accounts Payable 1,100

Cash 1,100

28 Advertising Expense 240

Advertising Payable 240

31 Cash 6,400
Accounts Receivable 6,000
Service Revenue 12,400

31 Salaries Expense 2,200

Rent Expense 1,900
Utilities Expense 560
Cash 4,660

31 Cash 1,120
Unearned Revenue 1,120

31 York, Withdrawals 7,200

Cash 7,200

© 2018 Pearson Education, Inc. 2-39

P2-29A, cont.
Requirement 2

Cash Accounts Payable

Jul. 1 63,000 510 Jul. 5 Jul. 22 1,100 1,600 Jul. 10
Jul. 19 22,000 23,000 Jul. 9 500 Bal.
Jul. 31 6,400 1,100 Jul. 22
Jul. 31 1,120 4,660 Jul. 31 Advertising Payable
7,200 Jul. 31 240 Jul. 28
Bal. 56,050 240 Bal.

Accounts Receivable Unearned Revenue

Jul. 31 6,000 1,120 Jul. 31
Bal. 6,000 1,120 Bal.

Office Supplies Notes Payable

Jul. 10 1,600 22,000 Jul. 19
Bal. 1,600 22,000 Bal.

Land York, Capital

Jul. 9 23,000 63,000 Jul. 1
Bal. 23,000 63,000 Bal.

York, Withdrawals
Jul. 31 7,200
Bal. 7,200

Service Revenue
12,400 Jul. 31
12,400 Bal.

Salaries Expense
Jul. 31 2,200
Bal. 2,200

Rent Expense
Jul. 5 510
Jul. 31 1,900
Bal. 2,410

Utilities Expense
Jul. 31 560
Bal. 560

Advertising Expense
Jul. 28 240
Bal. 240

© 2018 Pearson Education, Inc. 2-40

P2-29A, cont.
Requirement 3

VINCE YORK, MD
Trial Balance
July 31, 2018

Account Title Balance

Debit Credit
Cash $ 56,050
Accounts Receivable 6,000
Office Supplies 1,600
Land 23,000
Accounts Payable $ 500
Advertising Payable 240
Unearned Revenue 1,120
Notes Payable 22,000
York, Capital 63,000
York, Withdrawals 7,200
Service Revenue 12,400
Salaries Expense 2,200
Rent Expense 2,410
Utilities Expense 560
Advertising Expense 240
Total $ 99,260 $ 99,260

© 2018 Pearson Education, Inc. 2-41

P2-30A Journalizing transactions, posting journal entries to T-accounts, and preparing a trial
balance

Learning Objectives 3, 4

4. Total Debits $58,300

Ann Simpson started her practice as a design consultant on September 1, 2018. During the first month of
operations, the business completed the following transactions:

Sep. 1 Received $48,000 cash and gave capital to Simpson.

4 Purchased office supplies, $1,200, and furniture, $1,300, on account.
6 Performed services for a law firm and received $1,900 cash.
7 Paid $18,000 cash to acquire land to be used in operations.
10 Performed services for a hotel and received its promise to pay the $1,200
within one week.
14 Paid for the furniture purchased on September 4 on account.
15 Paid assistant’s semimonthly salary, $1,500.
17 Received cash on account, $1,000.
20 Prepared a design for a school on account, $650.
25 Received $2,100 cash for design services to be performed in October.
28 Received $2,900 cash for consulting with Plummer & Gordon.
29 Paid $600 cash for a 12-month insurance policy starting on October 1.
30 Paid assistant’s semimonthly salary, $1,500.
30 Paid monthly rent expense, $600.
30 Received a bill for utilities, $350. The bill will be paid next month.
30 Simpson withdrew cash of $3,700.

Requirements
1. Record each transaction in the journal using the following account titles: Cash; Accounts
Receivable; Office Supplies; Prepaid Insurance; Land; Furniture; Accounts Payable; Utilities
Payable; Unearned Revenue; Simpson, Capital; Simpson, Withdrawals; Service Revenue;
Salaries Expense; Rent Expense; and Utilities Expense. Explanations are not required.
2. Open a T-account for each of the accounts.
3. Post the journal entries to the T-accounts, using transaction dates as posting references in the
ledger accounts. Label the balance of each account Bal.
4. Prepare the trial balance of Ann Simpson, Designer, as of September 30, 2018.

© 2018 Pearson Education, Inc. 2-42

SOLUTION

Requirement 1

Posting
Date Accounts and Explanation Ref. Debit Credit
Sep. 1 Cash 48,000
Simpson, Capital 48,000

4 Office Supplies 1,200

Furniture 1,300
Accounts Payable 2,500

6 Cash 1,900
Service Revenue 1,900

7 Land 18,000
Cash 18,000

10 Accounts Receivable 1,200

Service Revenue 1,200

14 Accounts Payable 1,300

Cash 1,300

15 Salaries Expense 1,500

Cash 1,500

17 Cash 1,000
Accounts Receivable 1,000

20 Accounts Receivable 650

Service Revenue 650

25 Cash 2,100
Unearned Revenue 2,100

28 Cash 2,900
Service Revenue 2,900

29 Prepaid Insurance 600

Cash 600

30 Salaries Expense 1,500

Cash 1,500

30 Rent Expense 600

Cash 600

© 2018 Pearson Education, Inc. 2-43

P2-30A, cont.

30 Utilities Expense 350

Utilities Payable 350

30 Simpson, Withdrawals 3,700

Cash 3,700

Requirements 2 and 3

Cash Accounts Payable

Sep. 1 48,000 18,000 Sep. 7 Sep. 14 1,300 2,500 Sep. 4
Sep. 6 1,900 1,300 Sep. 14 1,200 Bal.
Sep. 17 1,000 1,500 Sep. 15
Sep. 25 2,100 600 Sep. 29
Sep. 28 2,900 1,500 Sep. 30 Utilities Payable
600 Sep. 30 350 Sep. 30
3,700 Sep. 30 350 Bal.
Bal. 28,700

Accounts Receivable Unearned Revenue

Sep. 10 1,200 1,000 Sep. 17 2,100 Sep. 25
Sep. 20 650 2,100 Bal.
Bal. 850

Office Supplies Simpson, Capital

Sep. 4 1,200 48,000 Sep. 1
Bal. 1,200 48,000 Bal.

Prepaid Insurance Simpson, Withdrawals

Sep. 29 600 Sep. 30 3,700
Bal. 600 Bal. 3,700

Land Service Revenue

Sep. 7 18,000 1,900 Sep. 6
Bal. 18,000 1,200 Sep. 10
650 Sep. 20
Furniture 2,900 Sep. 28
Sep. 4 1,300 6,650 Bal.
Bal. 1,300

© 2018 Pearson Education, Inc. 2-44

P2-30A, cont.

Salaries Expense
Sep. 15 1,500
Sep. 30 1,500
Bal. 3,000

Rent Expense
Sep. 30 600
Bal. 600

Utilities Expense
Sep. 30 350
Bal. 350

Requirement 4

ANN SIMPSON, DESIGNER

Trial Balance
September 30, 2018

Account Title Balance

Debit Credit
Cash $ 28,700
Accounts Receivable 850
Office Supplies 1,200
Prepaid Insurance 600
Land 18,000
Furniture 1,300
Accounts Payable $ 1,200
Utilities Payable 350
Unearned Revenue 2,100
Simpson, Capital 48,000
Simpson, Withdrawals 3,700
Service Revenue 6,650
Salaries Expense 3,000
Rent Expense 600
Utilities Expense 350
Total $ 58,300 $ 58,300

© 2018 Pearson Education, Inc. 2-45

P2-31A Journalizing transactions, posting journal entries to four-column accounts, and preparing
a trial balance

Learning Objectives 3, 4

3. Cash Balance $50,160

Terrence Murphy opened a law office on January 1, 2018. During the first month of operations, the
business completed the following transactions:

Jan. 1 Murphy contributed $78,000 cash to the business, Terrence Murphy,

Attorney. The business gave capital to Murphy.
3 Purchased office supplies, $600, and furniture, $1,700, on account.
4 Performed legal services for a client and received $1,000 cash.
7 Purchased a building with a market value of $130,000, and land with a
market value of $25,000. The business paid $25,000 cash and signed a note
payable to the bank for the remaining amount.
11 Prepared legal documents for a client on account, $400.
15 Paid assistant’s semimonthly salary, $1,120.
16 Paid for the office supplies purchased on January 3 on account.
18 Received $2,700 cash for helping a client sell real estate.
19 Defended a client in court and billed the client for $1,800.
25 Received a bill for utilities, $600. The bill will be paid next month.
29 Received cash on account, $1,500.
30 Paid $1,200 cash for a 12-month insurance policy starting on February 1.
30 Paid assistant’s semimonthly salary, $1,120.
31 Paid monthly rent expense, $1,800.
31 Murphy withdrew cash of $2,200.

Requirements
1. Record each transaction in the journal, using the following account titles: Cash; Accounts
Receivable; Office Supplies; Prepaid Insurance; Land; Building; Furniture; Accounts Payable;
Utilities Payable; Notes Payable; Murphy, Capital; Murphy, Withdrawals; Service Revenue;
Salaries Expense; Rent Expense; and Utilities Expense. Explanations are not required.
2. Open the following four-column accounts including account numbers: Cash, 101; Accounts
Receivable, 111; Office Supplies, 121; Prepaid Insurance, 131; Land, 141; Building, 151; Furniture,
161; Accounts Payable, 201; Utilities Payable, 211; Notes Payable, 221; Murphy, Capital, 301;
Murphy, Withdrawals, 311; Service Revenue, 411; Salaries Expense, 511; Rent Expense, 521; and
Utilities Expense, 531.
3. Post the journal entries to four-column accounts in the ledger, using dates, account numbers, journal
references, and posting references. Assume the journal entries were recorded on page 1 of the
journal.
4. Prepare the trial balance of Terrence Murphy, Attorney, at January 31, 2018.

© 2018 Pearson Education, Inc. 2-46

SOLUTION

Requirements 1 and 3
Posting
Date Accounts and Explanation Ref. Debit Credit
Jan. 1 Cash 101 78,000
Murphy, Capital 301 78,000

3 Office Supplies 121 600

Furniture 161 1,700
Accounts Payable 201 2,300

4 Cash 101 1,000

Service Revenue 411 1,000

7 Building 151 130,000

Land 141 25,000
Cash 101 25,000
Notes Payable 221 130,000

11 Accounts Receivable 111 400

Service Revenue 411 400

15 Salaries Expense 511 1,120

Cash 101 1,120

16 Accounts Payable 201 600

Cash 101 600

18 Cash 101 2,700

Service Revenue 411 2,700

19 Accounts Receivable 111 1,800

Service Revenue 411 1,800

25 Utilities Expense 531 600

Utilities Payable 211 600

29 Cash 101 1,500

Accounts Receivable 111 1,500

30 Prepaid Insurance 131 1,200

Cash 101 1,200

30 Salaries Expense 511 1,120

Cash 101 1,120

© 2018 Pearson Education, Inc. 2-47

P2-31A, cont.

31 Rent Expense 521 1,800

Cash 101 1,800

31 Murphy, Withdrawals 311 2,200

Cash 101 2,200

Requirements 2 and 3

CASH Account No. 101

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 1 J1 78,000 78,000
Jan. 4 J1 1,000 79,000
Jan. 7 J1 25,000 54,000
Jan. 15 J1 1,120 52,880
Jan. 16 J1 600 52,280
Jan. 18 J1 2,700 54,980
Jan. 29 J1 1,500 56,480
Jan. 30 J1 1,200 55,280
Jan. 30 J1 1,120 54,160
Jan. 31 J1 1,800 52,360
Jan. 31 J1 2,200 50,160

ACCOUNTS RECEIVABLE Account No. 111

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 11 J1 400 400
Jan. 19 J1 1,800 2,200
Jan. 29 J1 1,500 700

OFFICE SUPPLIES Account No. 121

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 3 J1 600 600

© 2018 Pearson Education, Inc. 2-48

P2-31A, cont.

PREPAID INSURANCE Account No. 131

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 30 J1 1,200 1,200

Account No. 141

LAND
Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 7 J1 25,000 25,000

BUILDING Account No. 151

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 7 J1 130,000 130,000

FURNITURE Account No. 161

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 3 J1 1,700 1,700

ACCOUNTS PAYABLE Account No. 201

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 3 J1 2,300 2,300
Jan. 16 J1 600 1,700

UTILITIES PAYABLE Account No. 211

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 25 J1 600 600

NOTES PAYABLE Account No. 221

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 7 J1 130,000 130,000

© 2018 Pearson Education, Inc. 2-49

P2-31A, cont.

MURPHY, CAPITAL Account No. 301

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 1 J1 78,000 78,000

MURPHY, WITHDRAWALS Account No. 311

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 31 J1 2,200 2,200

SERVICE REVENUE Account No. 411

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 4 J1 1,000 1,000
Jan. 11 J1 400 1,400
Jan. 18 J1 2,700 4,100
Jan. 19 J1 1,800 5,900

SALARIES EXPENSE Account No. 511

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 15 J1 1,120 1,120
Jan. 30 J1 1,120 2,240

RENT EXPENSE Account No. 521

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 31 J1 1,800 1,800

UTILITIES EXPENSE Account No. 531

Balance
Date Item Post Ref. Debit Credit Debit Credit
Jan. 25 J1 600 600

© 2018 Pearson Education, Inc. 2-50

P2-31A, cont.
Requirement 4

TERRENCE MURPHY, ATTORNEY

Trial Balance
January 31, 2018

Account Title Balance

Debit Credit
Cash $ 50,160
Accounts Receivable 700
Office Supplies 600
Prepaid Insurance 1,200
Land 25,000
Building 130,000
Furniture 1,700
Accounts Payable $ 1,700
Utilities Payable 600
Notes Payable 130,000
Murphy, Capital 78,000
Murphy, Withdrawals 2,200
Service Revenue 5,900
Salaries Expense 2,240
Rent Expense 1,800
Utilities Expense 600
Total $ 216,200 $ 216,200

© 2018 Pearson Education, Inc. 2-51

P2-32A Journalizing transactions, posting journal entries to four-column accounts, and preparing
a trial balance

Learning Objectives 3, 4

3. Cash Balance $12,500

The trial balance of Shawn Merry, CPA, is dated March 31, 2018:

During April, the business completed the following transactions:

Apr. 4 Collected $2,500 cash from a client on account.

8 Performed tax services for a client on account, $5,400.
13 Paid $3,000 on account.
14 Purchased furniture on account, $3,600.
15 Merry contributed his personal automobile to the business in exchange for
capital. The automobile had a market value of $9,500.
18 Purchased office supplies on account, $900.
19 Received $2,700 for tax services performed on April 8.
20 Merry withdrew cash of $6,500.
21 Received $5,700 cash for consulting work completed.
24 Received $2,400 cash for accounting services to be completed next month.
27 Paid office rent, $600.
28 Paid employee salary, $1,700.

© 2018 Pearson Education, Inc. 2-52

Requirements
1. Record the April transactions in the journal. Use the following accounts: Cash; Accounts
Receivable; Office Supplies; Land; Furniture; Automobile; Accounts Payable; Unearned
Revenue; Merry, Capital; Merry, Withdrawals; Service Revenue; Salaries Expense; and Rent
Expense. Include an explanation for each entry.
2. Open the four-column ledger accounts listed in the trial balance, together with their balances as
of March 31. Use the following account numbers: Cash, 11; Accounts Receivable, 12; Office
Supplies, 13; Land, 14; Furniture, 15; Automobile, 16; Accounts Payable, 21; Unearned
Revenue, 22; Merry, Capital, 31; Merry, Withdrawals, 33; Service Revenue, 41; Salaries
Expense, 51; and Rent Expense, 52.
3. Post the journal entries to four-column accounts in the ledger, using dates, account numbers,
journal references, and posting references. Assume the journal entries were recorded on page 5
of the journal.
4. Prepare the trial balance of Shawn Merry, CPA, at April 30, 2018.

SOLUTION

Requirement 1

Post.
Date Accounts and Explanation Ref. Debit Credit
Apr. 4 Cash 11 2,500
Accounts Receivable 12 2,500
Received cash from client on account.

8 Accounts Receivable 12 5,400

Service Revenue 41 5,400
Performed tax services for client on
account.

13 Accounts Payable 21 3,000

Cash 11 3,000
Paid cash on account.

© 2018 Pearson Education, Inc. 2-53

P2-32A, cont.

Apr. 14 Furniture 15 3,600

Accounts Payable 21 3,600
Purchased furniture on account.

15 Automobile 16 9,500
Merry, Capital 31 9,500
Owner contribution.

18 Office Supplies 13 900

Accounts Payable 21 900
Purchased office supplies on account.

19 Cash 11 2,700
Accounts Receivable 12 2,700
Received cash on account.

20 Merry, Withdrawals 33 6,500

Cash 11 6,500
Owner withdrawal.

21 Cash 11 5,700
Service Revenue 41 5,700
Received cash for consulting work.

24 Cash 11 2,400
Unearned Revenue 22 2,400
Received payment for services to be
performed next month.

27 Rent Expense 52 600

Cash 11 600
Paid office rent.

28 Salaries Expense 51 1,700

Cash 11 1,700
Paid employee salary.

© 2018 Pearson Education, Inc. 2-54

P2-32A, cont.
Requirements 2 and 3

CASH Account No. 11

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 11,000
Apr. 4 J5 2,500 13,500
Apr. 13 J5 3,000 10,500
Apr. 19 J5 2,700 13,200
Apr. 20 J5 6,500 6,700
Apr. 21 J5 5,700 12,400
Apr. 24 J5 2,400 14,800
Apr. 27 J5 600 14,200
Apr. 28 J5 1,700 12,500

ACCOUNTS RECEIVABLE Account No. 12

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 16,500
Apr. 4 J5 2,500 14,000
Apr. 8 J5 5,400 19,400
Apr. 19 J5 2,700 16,700

OFFICE SUPPLIES Account No. 13

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 400
Apr. 18 J5 900 1,300

LAND Account No. 14

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 30,000

FURNITURE Account No. 15

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 14 J5 3,600 3,600

© 2018 Pearson Education, Inc. 2-55

P2-32A, cont.

AUTOMOBILE Account No. 16

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 15 J5 9,500 9,500

ACCOUNTS PAYABLE Account No. 21

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 3,800
Apr. 13 J5 3,000 800
Apr. 14 J5 3,600 4,400
Apr. 18 J5 900 5,300

UNEARNED REVENUE Account No. 22

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 24 J5 2,400 2,400

MERRY, CAPITAL Account No. 31

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 52,300
Apr. 15 J5 9,500 61,800

MERRY, WITHDRAWALS Account No. 33

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 20 J5 6,500 6,500

SERVICE REVENUE Account No. 41

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 8,200
Apr. 8 J5 5,400 13,600
Apr. 21 J5 5,700 19,300

© 2018 Pearson Education, Inc. 2-56

P2-32A, cont.

SALARIES EXPENSE Account No. 51

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 5,600
Apr. 28 J5 1,700 7,300

RENT EXPENSE Account No. 52

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 800
Apr. 27 J5 600 1,400

Requirement 4

SHAWN MERRY, CPA

Trial Balance
April 30, 2018

Acct. No. Account Title Balance

Debit Credit
11 Cash $ 12,500
12 Accounts Receivable 16,700
13 Office Supplies 1,300
14 Land 30,000
15 Furniture 3,600
16 Automobile 9,500
21 Accounts Payable $ 5,300
22 Unearned Revenue 2,400
31 Merry, Capital 61,800
33 Merry, Withdrawals 6,500
41 Service Revenue 19,300
51 Salaries Expense 7,300
52 Rent Expense 1,400
Total $ 88,800 $ 88,800

© 2018 Pearson Education, Inc. 2-57

P2-33A Correcting errors in a trial balance

Learning Objective 4

Total Debits $123,250

The trial balance of Beautiful Tots Child Care does not balance.

The following errors are detected:

a. Cash is understated by $1,500.
b. A $4,100 debit to Accounts Receivable was posted as a credit.
c. A $1,400 purchase of office supplies on account was neither journalized nor posted.
d. Equipment was incorrectly transferred from the ledger as $91,500. It should have been
transferred as $83,000.
e. Salaries Expense is overstated by $700.
f. A $300 cash payment for advertising expense was neither journalized nor posted.
g. A $200 owner’s withdrawal of cash was incorrectly journalized as $2,000.
h. Service Revenue was understated by $4,100.
i. A 12-month insurance policy was posted as a $1,900 credit to Prepaid Insurance. Cash was
posted correctly.

Prepare the corrected trial balance as of August 31, 2018. Journal entries are not required.

© 2018 Pearson Education, Inc. 2-58

SOLUTION

BEAUTIFUL TOTS CHILD CARE

Trial Balance
August 31, 2018

Account Title Balance

Debit Credit
Cash $ 10,900
Accounts Receivable 14,900
Office Supplies 2,400
Prepaid Insurance 4,100
Equipment 83,000
Accounts Payable $ 4,800
Notes Payable 45,000
Trumball, Capital 57,000
Trumball, Withdrawals 3,200
Service Revenue 16,450
Salaries Expense 3,700
Rent Expense 750
Advertising Expense 300
Total $ 123,250 $ 123,250

Explanations:

a. Increase Cash by $1,500.

b. Increase Accounts Receivable by $8,200 ($4,100 × 2).

c. Increase Office Supplies and Accounts Payable by $1,400 each.

d. Decrease Equipment by $8,500 ($91,500 − $83,000).

e. Decrease Salaries Expense by $700.

f. Advertising Expense should have a debit balance of $300. Decrease Cash by $300.

g. Trumball, Withdrawals should decrease by $1,800 and Cash should increase by $1,800 ($2,000 −

$200).

h. Service Revenue should increase by $4,100.

i. Prepaid Insurance should increase by $3,800 ($1,900 × 2).

© 2018 Pearson Education, Inc. 2-59

P2-34A Preparing financial statements from the trial balance and calculating the debt ratio

Learning Objectives 4, 5

2. Ending Capital $29,788

The trial balance as of July 31, 2018, for Sara Simon, Registered Dietician, is presented below:

Requirements
1. Prepare the income statement for the month ended July 31, 2018.
2. Prepare the statement of owner’s equity for the month ended July 31, 2018. The beginning
balance of capital was $0 and the owner contributed $18,000 during the month.
3. Prepare the balance sheet as of July 31, 2018.
4. Calculate the debt ratio as of July 31, 2018.

© 2018 Pearson Education, Inc. 2-60

SOLUTION

Requirement 1

SARA SIMON, REGISTERED DIETICIAN

Income Statement
Month Ended July 31, 2018

Revenues:
Service Revenue $ 17,888
Expenses:
Salaries Expense $ 1,700
Rent Expense 1,100
Utilities Expense 500
Total Expenses 3,300
Net Income $ 14,588

Requirement 2

SARA SIMON, REGISTERED DIETICIAN

Statement of Owner’s Equity
Month Ended July 31, 2018
Simon, Capital, July 1, 2018 $ 0
Owner contribution 18,000
Net income for the month 14,588
32,588
Owner withdrawals (2,800)
Simon, Capital, July 31, 2018 $ 29,788

© 2018 Pearson Education, Inc. 2-61

P2-34A, cont.
Requirements 3

SARA SIMON, REGISTERED DIETICIAN

Balance Sheet
July 31, 2018

Assets Liabilities
Cash $ 38,000 Accounts Payable $ 3,000
Accounts Receivable 9,000 Unearned Revenue 3,912
Office Supplies 2,300 Notes Payable 31,000
Prepaid Insurance 2,400 Total Liabilities 37,912
Equipment 16,000
Owner’s Equity
Simon, Capital 29,788
Total Assets $ 67,700 Total Liabilities and Owner’s Equity $ 67,700

Requirement 4

Debt ratio = Total liabilities / Total assets = $37,912 / $67,700 = 0.56 = 56%

© 2018 Pearson Education, Inc. 2-62

Problems (Group B)
P2-35B Journalizing transactions, posting journal entries to T-accounts, and preparing a trial
balance

Learning Objectives 3, 4

2. Cash Balance $69,680

Victor Yang practices medicine under the business title Victor Yang, M.D. During March, the medical
practice completed the following transactions:

Mar. 1 Yang contributed $62,000 cash to the business in exchange for capital.
5 Paid monthly rent on medical equipment, $570.
9 Paid $14,000 cash to purchase land to be used in operations.
10 Purchased office supplies on account, $1,500.
19 Borrowed $27,000 from the bank for business use.
22 Paid $1,400 on account.
28 The business received a bill for advertising in the daily newspaper to be paid in
April, $220.
31 Revenues earned during the month included $6,700 cash and $5,800 on account.
31 Paid employees’ salaries $2,100, office rent $1,500, and utilities $350. Record
as a compound entry.
31 The business received $1,000 for medical screening services to be performed
next month.
31 Yang withdrew cash of $7,100

The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Land; Accounts
Payable; Advertising Payable; Unearned Revenue; Notes Payable; Yang, Capital; Yang, Withdrawals;
Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; and Advertising Expense.

Requirements
1. Journalize each transaction. Explanations are not required.
2. Post the journal entries to the T-accounts, using transaction dates as posting references in the
ledger accounts. Label the balance of each account Bal.
3. Prepare the trial balance of Victor Yang, M.D., as of March 31, 2018.

© 2018 Pearson Education, Inc. 2-63

SOLUTION

Requirement 1
Posting
Date Accounts and Explanation Ref. Debit Credit
Mar. 1 Cash 62,000
Yang, Capital 62,000

5 Rent Expense 570

Cash 570

9 Land 14,000
Cash 14,000

10 Office Supplies 1,500

Accounts Payable 1,500

19 Cash 27,000
Notes Payable 27,000

22 Accounts Payable 1,400

Cash 1,400

28 Advertising Expense 220

Advertising Payable 220

31 Cash 6,700
Accounts Receivable 5,800
Service Revenue 12,500

31 Salaries Expense 2,100

Rent Expense 1,500
Utilities Expense 350
Cash 3,950

31 Cash 1,000
Unearned Revenue 1,000

31 Yang, Withdrawals 7,100

Cash 7,100

© 2018 Pearson Education, Inc. 2-64

P2-35B, cont.
Requirement 2

Cash Accounts Payable

Mar. 1 62,000 570 Mar. 5 Mar. 22 1,400 1,500 Mar. 10
Mar. 19 27,000 14,000 Mar. 9 100 Bal.
Mar. 31 6,700 1,400 Mar. 22
Mar. 31 1,000 3,950 Mar. 31 Advertising Payable
7,100 Mar. 31 220 Mar. 28
Bal. 69,680 220 Bal.

Accounts Receivable Unearned Revenue

Mar. 31 5,800 1,000 Mar. 31
Bal. 5,800 1,000 Bal.

Office Supplies Notes Payable

Mar. 10 1,500 27,000 Mar. 19
Bal. 1,500 27,000 Bal.

Land Yang, Capital

Mar. 9 14,000 62,000 Mar. 1
Bal. 14,000 62,000 Bal.

Yang, Withdrawals
Mar. 31 7,100
Bal. 7,100

Service Revenue
12,500 Mar. 31
12,500 Bal.

Salaries Expense
Mar. 31 2,100
Bal. 2,100

Rent Expense
Mar. 5 570
Mar. 31 1,500
Bal. 2,070

Utilities Expense
Mar. 31 350
Bal. 350

Advertising Expense
Mar. 28 220
Bal. 220

© 2018 Pearson Education, Inc. 2-65

P2-35B, cont.
Requirement 3

VICTOR YANG, MD
Trial Balance
March 31, 2018

Account Title Balance

Debit Credit
Cash $ 69,680
Accounts Receivable 5,800
Office Supplies 1,500
Land 14,000
Accounts Payable $ 100
Advertising Payable 220
Unearned Revenue 1,000
Notes Payable 27,000
Yang, Capital 62,000
Yang, Withdrawals 7,100
Service Revenue 12,500
Salaries Expense 2,100
Rent Expense 2,070
Utilities Expense 350
Advertising Expense 220
Total $ 102,820 $ 102,820

© 2018 Pearson Education, Inc. 2-66

P2-36B Journalizing transactions, posting journal entries to T-accounts, and preparing a trial
balance

Learning Objectives 3, 4

4. Total Debits $51,430

Beth Stewart started her practice as a design consultant on November 1, 2018. During the first month of
operations, the business completed the following transactions:

Nov. 1 Received $41,000 cash and gave capital to Stewart.

4 Purchased office supplies, $1,200, and furniture, $2,300, on account.
6 Performed services for a law firm and received $2,100 cash.
7 Paid $27,000 cash to acquire land to be used in operations.
10 Performed services for a hotel and received its promise to pay the $800 within
one week.
14 Paid for the furniture purchased on November 4 on account.
15 Paid assistant’s semimonthly salary, $1,470.
17 Received cash on account, $500.
20 Prepared a design for a school on account, $680.
25 Received $1,900 cash for design services to be performed in December.
28 Received $3,100 cash for consulting with Plummer & Gordon.
29 Paid $840 cash for a 12-month insurance policy starting on December 1.
30 Paid assistant’s semimonthly salary, $1,470.
30 Paid monthly rent expense, $650.
30 Received a bill for utilities, $650. The bill will be paid next month.
30 Stewart withdrew cash of $2,800.

Requirements
1. Record each transaction in the journal using the following account titles: Cash; Accounts
Receivable; Office Supplies; Prepaid Insurance; Land; Furniture; Accounts Payable; Utilities
Payable; Unearned Revenue; Stewart, Capital; Stewart, Withdrawals; Service Revenue; Salaries
Expense; Rent Expense; and Utilities Expense. Explanations are not required.
2. Open a T-account for each of the accounts.
3. Post the journal entries to the T-accounts, using transaction dates as posting references in the
ledger accounts. Label the balance of each account Bal.
4. Prepare the trial balance of Beth Stewart, Designer, as of November 30, 2018.

© 2018 Pearson Education, Inc. 2-67

SOLUTION

Requirement 1
Posting
Date Accounts and Explanation Ref. Debit Credit
Nov. 1 Cash 41,000
Stewart, Capital 41,000

4 Office Supplies 1,200

Furniture 2,300
Accounts Payable 3,500

6 Cash 2,100
Service Revenue 2,100

7 Land 27,000
Cash 27,000

10 Accounts Receivable 800

Service Revenue 800

14 Accounts Payable 2,300

Cash 2,300

15 Salaries Expense 1,470

Cash 1,470

17 Cash 500
Accounts Receivable 500

20 Accounts Receivable 680

Service Revenue 680

25 Cash 1,900
Unearned Revenue 1,900

28 Cash 3,100
Service Revenue 3,100

29 Prepaid Insurance 840

Cash 840

30 Salaries Expense 1,470

Cash 1,470

30 Rent Expense 650

Cash 650

© 2018 Pearson Education, Inc. 2-68

P2-36B, cont.

Nov. 30 Utilities Expense 650

Utilities Payable 650

30 Stewart, Withdrawals 2,800

Cash 2,800

Requirements 2 and 3

Cash Accounts Payable

Nov. 1 41,000 27,000 Nov. 7 Nov. 14 2,300 3,500 Nov. 4
Nov. 6 2,100 2,300 Nov. 14 1,200 Bal.
Nov. 17 500 1,470 Nov. 15
Nov. 25 1,900 840 Nov. 29
Nov. 28 3,100 1,470 Nov. 30 Utilities Payable
650 Nov. 30 650 Nov. 30
2,800 Nov. 30 650 Bal.
Bal. 12,070

Accounts Receivable Unearned Revenue

Nov. 10 800 500 Nov. 17 1,900 Nov. 25
Nov. 20 680 1,900 Bal.
Bal. 980

Office Supplies Stewart, Capital

Nov. 4 1,200 41,000 Nov. 1
Bal. 1,200 41,000 Bal.

Prepaid Insurance Stewart, Withdrawals

Nov. 29 840 Nov. 30 2,800
Bal. 840 Bal. 2,800

Land Service Revenue

Nov. 7 27,000 2,100 Nov. 6
Bal. 27,000 800 Nov. 10
680 Nov. 20
Furniture 3,100 Nov. 28
Nov. 4 2,300 6,680 Bal.
Bal. 2,300

Salaries Expense
Nov. 15 1,470
Nov. 30 1,470
Bal. 2,940

© 2018 Pearson Education, Inc. 2-69

P2-36B, cont.

Rent Expense
Nov. 30 650
Bal. 650

Utilities Expense
Nov. 30 650
Bal. 650

Requirement 4

BETH STEWART, DESIGNER

Trial Balance
November 30, 2018

Account Title Balance

Debit Credit
Cash $ 12,070
Accounts Receivable 980
Office Supplies 1,200
Prepaid Insurance 840
Land 27,000
Furniture 2,300
Accounts Payable $ 1,200
Utilities Payable 650
Unearned Revenue 1,900
Stewart, Capital 41,000
Stewart, Withdrawals 2,800
Service Revenue 6,680
Salaries Expense 2,940
Rent Expense 650
Utilities Expense 650
Total $ 51,430 $ 51,430

© 2018 Pearson Education, Inc. 2-70

P2-37B Journalizing transactions, posting journal entries to four-column accounts, and preparing
a trial balance

Learning Objectives 3, 4

3. Service Revenue Balance $6,800

Theodore McMahon opened a law office on April 1, 2018. During the first month of operations, the
business completed the following transactions:

Apr. 1 McMahon contributed $70,000 cash to the business, Theodore McMahon,

Attorney. The business issued gave capital to McMahon.
3 Purchased office supplies, $1,100, and furniture, $1,300, on account.
4 Performed legal services for a client and received $2,000 cash.
7 Purchased a building with a market value of $150,000, and land with a market
value of $30,000. The business paid $40,000 cash and signed a note payable to
the bank for the remaining amount.
11 Prepared legal documents for a client on account, $400.
15 Paid assistant’s semimonthly salary, $1,200.
16 Paid for the office supplies purchased on April 3 on account.
18 Received $2,700 cash for helping a client sell real estate.
19 Defended a client in court and billed the client for $1,700.
25 Received a bill for utilities, $650. The bill will be paid next month.
28 Received cash on account, $1,100.
29 Paid $3,600 cash for a 12-month insurance policy starting on May 1.
29 Paid assistant’s semimonthly salary, $1,200.
30 Paid monthly rent expense, $2,100.
30 McMahon withdrew cash of $3,200.

Requirements
1. Record each transaction in the journal, using the following account titles: Cash; Accounts
Receivable; Office Supplies; Prepaid Insurance; Land; Building; Furniture; Accounts Payable;
Utilities Payable; Notes Payable; McMahon, Capital; McMahon, Withdrawals; Service Revenue;
Salaries Expense; Rent Expense; and Utilities Expense. Explanations are not required.
2. Open the following four-column accounts including account numbers: Cash, 101; Accounts
Receivable, 111; Office Supplies, 121; Prepaid Insurance, 131; Land, 141; Building, 151;
Furniture, 161; Accounts Payable, 201; Utilities Payable, 211; Notes Payable, 221; McMahon,
Capital, 301; McMahon, Withdrawals, 311; Service Revenue, 411; Salaries Expense, 511; Rent
Expense, 521; and Utilities Expense, 531.
3. Post the journal entries to four-column accounts in the ledger, using dates, account numbers,
journal references, and posting references. Assume the journal entries were recorded on page 1
of the journal.
4. Prepare the trial balance of Theodore McMahon, Attorney, at April 30, 2018.

© 2018 Pearson Education, Inc. 2-71

SOLUTION

Requirement 1

Posting
Date Accounts and Explanation Ref. Debit Credit
Apr. 1 Cash 101 70,000
McMahon, Capital 301 70,000

3 Office Supplies 121 1,100

Furniture 161 1,300
Accounts Payable 201 2,400

4 Cash 101 2,000

Service Revenue 411 2,000

7 Building 151 150,000

Land 141 30,000
Cash 101 40,000
Notes Payable 221 140,000

11 Accounts Receivable 111 400

Service Revenue 411 400

15 Salaries Expense 511 1,200

Cash 101 1,200

16 Accounts Payable 201 1,100

Cash 101 1,100

18 Cash 101 2,700

Service Revenue 411 2,700

19 Accounts Receivable 111 1,700

Service Revenue 411 1,700

25 Utilities Expense 531 650

Utilities Payable 211 650

28 Cash 101 1,100

Accounts Receivable 111 1,100

29 Prepaid Insurance 131 3,600

Cash 101 3,600

29 Salaries Expense 511 1,200

Cash 101 1,200

© 2018 Pearson Education, Inc. 2-72

P2-37B, cont.
Apr. 30 Rent Expense 521 2,100
Cash 101 2,100

30 McMahon, Withdrawals 311 3,200

Cash 101 3,200

Requirements 2 and 3

CASH Account No. 101

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 1 J1 70,000 70,000
Apr. 4 J1 2,000 72,000
Apr. 7 J1 40,000 32,000
Apr. 15 J1 1,200 30,800
Apr. 16 J1 1,100 29,700
Apr. 18 J1 2,700 32,400
Apr. 28 J1 1,100 33,500
Apr. 29 J1 3,600 29,900
Apr. 29 J1 1,200 28,700
Apr. 30 J1 2,100 26,600
Apr. 30 J1 3,200 23,400

ACCOUNTS RECEIVABLE Account No. 111

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 11 J1 400 400
Apr. 19 J1 1,700 2,100
Apr. 28 J1 1,100 1,000

OFFICE SUPPLIES Account No. 121

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 3 J1 1,100 1,100

PREPAID INSURANCE Account No. 131

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 29 J1 3,600 3,600

© 2018 Pearson Education, Inc. 2-73

P2-37B, cont.

LAND Account No. 141

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 7 J1 30,000 30,000

BUILDING Account No. 151

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 7 J1 150,000 150,000

FURNITURE Account No. 161

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 3 J1 1,300 1,300

ACCOUNTS PAYABLE Account No. 201

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 3 J1 2,400 2,400
Apr. 16 J1 1,100 1,300

UTILITIES PAYABLE Account No. 211

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 25 J1 650 650

NOTES PAYABLE Account No. 221

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 7 J1 140,000 140,000

MCMAHON, CAPITAL Account No. 301

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 1 J1 70,000 70,000

© 2018 Pearson Education, Inc. 2-74

P2-37B, cont.

MCMAHON, WITHDRAWALS Account No. 311

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 30 J1 3,200 3,200

SERVICE REVENUE Account No. 411

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 4 J1 2,000 2,000
Apr. 11 J1 400 2,400
Apr. 18 J1 2,700 5,100
Apr. 19 J1 1,700 6,800

SALARIES EXPENSE Account No. 511

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 15 J1 1,200 1,200
Apr. 29 J1 1,200 2,400

RENT EXPENSE Account No. 521

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 30 J1 2,100 2,100

UTILITIES EXPENSE Account No. 531

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 25 J1 650 650

© 2018 Pearson Education, Inc. 2-75

P2-37B, cont.
Requirement 4

THEODORE MCMAHON, ATTORNEY

Trial Balance
April 30, 2018

Account Title Balance

Debit Credit
Cash $ 23,400
Accounts Receivable 1,000
Office Supplies 1,100
Prepaid Insurance 3,600
Land 30,000
Building 150,000
Furniture 1,300
Accounts Payable $ 1,300
Utilities Payable 650
Notes Payable 140,000
McMahon, Capital 70,000
McMahon, Withdrawals 3,200
Service Revenue 6,800
Salaries Expense 2,400
Rent Expense 2,100
Utilities Expense 650
Total $ 218,750 $ 218,750

© 2018 Pearson Education, Inc. 2-76

P2-38B Journalizing transactions, posting journal entries to four-column accounts, and preparing
a trial balance

Learning Objectives 3, 4

3. Cash Balance $20,250

The trial balance of John Menning, CPA, is dated March 31, 2018:

During April, the business completed the following transactions:

Apr. 4 Collected $6,000 cash from a client on account.

8 Performed tax services for a client on account, $5,500.
13 Paid $3,300 on account.
14 Purchased furniture on account, $4,000.
15 Menning contributed his personal automobile to the business in exchange for
capital. The automobile had a market value of $11,500.
18 Purchased office supplies on account, $1,600.
19 Received $2,750 for tax services performed on April 8.
20 Menning withdrew cash of $7,500.
21 Received $4,900 cash for consulting work completed.
24 Received $2,500 cash for accounting services to be completed next month.
27 Paid office rent, $900.
28 Paid employee salary, $1,200.

© 2018 Pearson Education, Inc. 2-77

Requirements
1. Record the April transactions in the journal using the following accounts: Cash; Accounts
Receivable; Office Supplies; Land; Furniture; Automobile; Accounts Payable; Unearned
Revenue; Menning, Capital; Menning, Withdrawals; Service Revenue; Salaries Expense; and
Rent Expense. Include an explanation for each entry.
2. Open the four-column ledger accounts listed in the trial balance, together with their balances as
of March 31. Use the following account numbers: Cash, 11; Accounts Receivable, 12; Office
Supplies, 13; Land, 14; Furniture, 15; Automobile, 16; Accounts Payable, 21; Unearned
Revenue, 22; Menning, Capital, 31; Menning, Withdrawals, 33; Service Revenue, 41; Salaries
Expense, 51; and Rent Expense, 52.
3. Post the journal entries to four-column accounts in the ledger, using dates, account numbers,
journal references, and posting references. Assume the journal entries were recorded on page 5
of the journal.
4. Prepare the trial balance of John Menning, CPA, at April 30, 2018.

© 2018 Pearson Education, Inc. 2-78

SOLUTION

Requirement 1
Date Accounts and Explanation Posting Debit Credit
Ref.
Apr. 4 Cash 11 6,000
Accounts Receivable 12 6,000
Received cash from client on account.

8 Accounts Receivable 12 5,500

Service Revenue 41 5,500
Performed tax services for client on
account.

13 Accounts Payable 21 3,300

Cash 11 3,300
Paid cash on account.

14 Furniture 15 4,000
Accounts Payable 21 4,000
Purchased furniture on account.

15 Automobile 16 11,500
Menning, Capital 31 11,500
Owner contribution.

18 Office Supplies 13 1,600

Accounts Payable 21 1,600
Purchased office supplies on account.

19 Cash 11 2,750
Accounts Receivable 12 2,750
Received cash on account.

20 Menning, Withdrawals 33 7,500

Cash 11 7,500
Owner withdrawal.

21 Cash 11 4,900
Service Revenue 41 4,900
Received cash for consulting work.

24 Cash 11 2,500
Unearned Revenue 22 2,500
Received payment for services to be
performed next month.

© 2018 Pearson Education, Inc. 2-79

P2-38B, cont.

Apr. 27 Rent Expense 52 900

Cash 11 900
Paid office rent.

28 Salaries Expense 51 1,200

Cash 11 1,200
Paid employee salary.

Requirements 2 and 3

CASH Account No. 11

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 17,000
Apr. 4 J5 6,000 23,000
Apr. 13 J5 3,300 19,700
Apr. 19 J5 2,750 22,450
Apr. 20 J5 7,500 14,950
Apr. 21 J5 4,900 19,850
Apr. 24 J5 2,500 22,350
Apr. 27 J5 900 21,450
Apr. 28 J5 1,200 20,250

ACCOUNTS RECEIVABLE Account No. 12

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 10,500
Apr. 4 J5 6,000 4,500
Apr. 8 J5 5,500 10,000
Apr. 19 J5 2,750 7,250

OFFICE SUPPLIES Account No. 13

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 1,200
Apr. 18 J5 1,600 2,800

© 2018 Pearson Education, Inc. 2-80

P2-38B, cont.
LAND Account No. 14
Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 29,000

FURNITURE Account No. 15

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 14 J5 4,000 4,000

AUTOMOBILE Account No. 16

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 15 J5 11,500 11,500

ACCOUNTS PAYABLE Account No. 21

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 3,800
Apr. 13 J5 3,300 500
Apr. 14 J5 4,000 4,500
Apr. 18 J5 1,600 6,100

UNEARNED REVENUE Account No. 22

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 24 J5 2,500 2,500

MENNING, CAPITAL Account No. 31

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 46,200
Apr. 15 J5 11,500 57,700

MENNING, WITHDRAWALS Account No. 33

Balance
Date Item Post Ref. Debit Credit Debit Credit
Apr. 20 J5 7,500 7,500

© 2018 Pearson Education, Inc. 2-81

P2-38B, cont.

SERVICE REVENUE Account No. 41

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 11,200
Apr. 8 J5 5,500 16,700
Apr. 21 J5 4,900 21,600

SALARIES EXPENSE Account No. 51

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 2,500
Apr. 28 J5 1,200 3,700

RENT EXPENSE Account No. 52

Balance
Date Item Post Ref. Debit Credit Debit Credit
Mar. 31 Balance 1,000
Apr. 27 J5 900 1,900

Requirement 4

JOHN MENNING, CPA

Trial Balance
April 30, 2018

Acct. No. Account Title Balance

Debit Credit
11 Cash $ 20,250
12 Accounts Receivable 7,250
13 Office Supplies 2,800
14 Land 29,000
15 Furniture 4,000
16 Automobile 11,500
21 Accounts Payable $ 6,100
22 Unearned Revenue 2,500
31 Menning, Capital 57,700
33 Menning, Withdrawals 7,500
41 Service Revenue 21,600
51 Salaries Expense 3,700
52 Rent Expense 1,900
Total $ 87,900 $ 87,900

© 2018 Pearson Education, Inc. 2-82

P2-39B Correcting errors in a trial balance

Learning Objective 4

Total Debits $123,300

The trial balance of Love to Learn Child Care does not balance.

The following errors are detected:

a. Cash is understated by $1,800.

b. A $3,800 debit to Accounts Receivable was posted as a credit.
c. A $1,000 purchase of office supplies on account was neither journalized nor posted.
d. Equipment was incorrectly transferred from the ledger as $90,400. It should have been
transferred as $82,500.
e. Salaries Expense is overstated by $350.
f. A $300 cash payment for advertising expense was neither journalized nor posted.
g. A $160 owner’s withdrawal of cash was incorrectly journalized as $1,600.
h. Service Revenue was understated by $4,000.
i. A 12-month insurance policy was posted as a $1,400 credit to Prepaid Insurance. Cash was
posted correctly.

Prepare the corrected trial balance as of May 31, 2018. Journal entries are not required.

© 2018 Pearson Education, Inc. 2-83

SOLUTION

LOVE TO LEARN CHILD CARE

Trial Balance
May 31, 2018

Account Title Balance

Debit Credit
Cash $ 11,000
Accounts Receivable 16,300
Office Supplies 2,000
Prepaid Insurance 4,500
Equipment 82,500
Accounts Payable $ 4,000
Notes Payable 45,000
Ebony, Capital 54,000
Ebony, Withdrawals 2,300
Service Revenue 20,300
Salaries Expense 4,000
Rent Expense 400
Advertising Expense 300
Total $ 123,300 $ 123,300

Explanations:

a. Increase Cash by $1,800.

b. Increase Accounts Receivable by $7,600 ($3,800 × 2).

c. Increase Office Supplies and Accounts Payable by $1,000 each.

d. Decrease Equipment by $7,900 ($90,400 − $82,500).

e. Decrease Salaries Expense by $350.

f. Advertising Expense should have a debit balance of $300. Decrease Cash by $300.

g. Ebony, Withdrawals should decrease by $1,440 and Cash should increase by $1,440 ($1,600 − $160).

h. Service Revenue should increase by $4,000.

i. Prepaid Insurance should increase by $2,800 ($1,400 × 2).

© 2018 Pearson Education, Inc. 2-84

P2-40B Preparing financial statements from the trial balance and calculating the debt ratio

Learning Objectives 4, 5

1. Net Income $13,404

The trial balance as of July 31, 2018, for Sheila Sanchez, Registered Dietician, is presented below:

Requirements
1. Prepare the income statement for the month ended July 31, 2018.
2. Prepare the statement of owner’s equity for the month ended July 31, 2018. The beginning
balance of owner’s equity was $0 and the owner contributed $20,000 during the month.
3. Prepare the balance sheet as of July 31, 2018.
4. Calculate the debt ratio as of July 31, 2018.

© 2018 Pearson Education, Inc. 2-85

SOLUTION

Requirement 1
SHEILA SANCHEZ, REGISTERED DIETICIAN
Income Statement
Month Ended July 31, 2018

Revenues:
Service Revenue $ 15,804
Expenses:
Salaries Expense $ 1,600
Rent Expense 700
Utilities Expense 100
Total Expenses 2,400
Net Income $ 13,404

Requirement 2

SHEILA SANCHEZ, REGISTERED DIETICIAN

Statement of Owner’s Equity
Month Ended July 31, 2018
Sanchez, Capital, July 1, 2018 $ 0
Owner contribution 20,000
Net income for the month 13,404
33,404
Owner withdrawals (3,000)
Sanchez, Capital, July 31, 2018 $ 30,404

© 2018 Pearson Education, Inc. 2-86

P2-40B, cont.
Requirement 3

SHEILA SANCHEZ, REGISTERED DIETICIAN

Balance Sheet
July 31, 2018

Assets Liabilities
Cash $ 32,000 Accounts Payable $ 3,400
Accounts Receivable 9,100 Unearned Revenue 1,296
Office Supplies 1,400 Notes Payable 34,000
Prepaid Insurance 2,600 Total Liabilities $ 38,696
Equipment 24,000
Owner’s Equity
Sanchez, Capital 30,404
Total Assets $ 69,100 Total Liabilities and Owner’s Equity $ 69,100

Requirement 4

Debt ratio = Total liabilities / Total assets = $38,696 / $69,100 = 0.56 = 56%

© 2018 Pearson Education, Inc. 2-87

Using Excel
P2-41 Using Excel to journalize and post transactions, and to create financial statements

Download an Excel template for this problem online in MyAccountingLab or at

http://www.pearsonhighered.com/Horngren.

Redmond Company started operations on April 1, 2018. Seventeen transactions occurred during April.
Financial statements are prepared at the end of the month.

Requirements
1. Use Excel to record the transactions for April. Use the blue shaded areas for inputs.
a. To record the account name in the journal, click in the Account and Explanation column. A
drop down arrow will appear to the right. Click the arrow and select an account from the chart
of accounts. Use the explanation to help you with the entry.

b. Indent the account name of the account to be credited using the indent button on the Home tab.
Click the Increase Indent button twice.

2. Post the transactions to T-Accounts. Use the blue shaded areas for inputs.
a. For each transaction, post the amount on the correct side of the T-Account. The T-account
totals will be calculated automatically.
b. Total debits should equal total credits. The debit-credit balance check appears in the top right-
hand corner of the T-Account worksheet.
3. Prepare the income statement, statement of owner’s equity, and balance sheet for the company
using the trial balance. Each financial statement appears on a separate worksheet tab.
a. Fill in the blue shaded areas using a formula that references the account balances in the T-
Accounts at the end of the month.
b. Format the cells requiring dollar signs. Number formatting is located on the Home tab.

c. Format the cells requiring a single underline and cells requiring double underlines. The
borders tool is found on the Home tab. It looks like a window pane. Click the down arrow for
different border selections.

© 2018 Pearson Education, Inc. 2-88

SOLUTION

The student templates for Using Excel are available online in MyAccountingLab in the Multimedia
Library or at http://www.pearsonhighered.com/Horngren. The solution to Using Excel is located in
MyAccountingLab in the Instructor Resource Center or at http://www.pearsonhighered.com/Horngren.

© 2018 Pearson Education, Inc. 2-89

Continuing Problem
P2-42 Journalizing transactions, posting to T-accounts, and preparing a trial balance

Problem P2-42 continues with the company introduced in Chapter 1, Canyon Canoe Company. Here you
will account for Canyon Canoe Company’s transactions as it is actually done in practice. Begin by
reviewing the transactions from Chapter 1. The transactions have been reprinted below.

Nov. 1 Received $16,000 cash to begin the company and gave capital to Amber
Wilson.
2 Signed a lease for a building and paid $1,200 for the first month’s rent.
3 Purchased canoes for $4,800 on account.
4 Purchased office supplies on account, $750.
7 Earned $1,400 cash for rental of canoes.
13 Paid $1,500 cash for wages.
15 Wilson withdrew $50 cash from the business.
16 Received a bill for $150 for utilities. (Use separate payable account.)
20 Received a bill for $175 for cell phone expenses. (Use separate payable
account.)
22 Rented canoes to Early Start Daycare on account, $3,000.
26 Paid $1,000 on account related to the November 3 purchase.
28 Received $750 from Early Start Daycare for canoe rental on November 22.
30 Wilson withdrew cash of $100 from the business.

In addition, Canyon Canoe Company completed the following transactions for December.

Dec. 1 Amber contributed land on the river (worth $85,000) and a small building to use as a
rental office (worth $35,000) in exchange for capital.
1 Prepaid $3,000 for three months’ rent on the warehouse where the company stores the
canoes.
2 Purchased canoes signing a note payable for $7,200
4 Purchased office supplies on account for $500.
9 Received $4,500 cash for canoe rentals to customers.
15 Rented canoes to customers for $3,500, but will be paid next month.
16 Received a $750 deposit from a canoe rental group that will use the canoes next
month.
18 Paid the utilities and telephone bills from last month.
19 Paid various accounts payable, $2,000.
20 Received bills for the telephone ($325) and utilities ($295) which will be paid later.
31 Paid wages of $1,800.
31 Wilson withdrew cash of $300 from the business.

Requirements
1. Journalize the transactions for both November and December, using the following accounts:
Cash; Accounts Receivable; Office Supplies; Prepaid Rent; Land; Building; Canoes; Accounts
Payable; Utilities Payable; Telephone Payable; Unearned Revenue; Notes Payable; Wilson,
Capital; Wilson, Withdrawals; Canoe Rental Revenue; Rent Expense; Utilities Expense; Wages
Expense; and Telephone Expense. Explanations are not required. (Hint: For November
transactions, refer to your answer for Chapter 1.)

© 2018 Pearson Education, Inc. 2-90

2. Open a T-account for each of the accounts.
3. Post the journal entries to the T-accounts, and calculate account balances. Formal posting
references are not required.
4. Prepare a trial balance as of December 31, 2018.
5. Prepare the income statement of Canyon Canoe Company for the two months ended December
31, 2018.
6. Prepare the statement of owner’s equity for the two months ended December 31, 2018.
7. Prepare the balance sheet as of December 31, 2018.
8. Calculate the debt ratio for Canyon Canoe Company at December 31, 2018.

© 2018 Pearson Education, Inc. 2-91

SOLUTION

Requirement 1

Posting
Date Accounts and Explanation Ref. Debit Credit
Nov. 1 Cash 16,000
Wilson, Capital 16,000

2 Rent Expense 1,200

Cash 1,200

3 Canoes 4,800
Accounts Payable 4,800

4 Office Supplies 750

Accounts Payable 750

7 Cash 1,400
Canoe Rental Revenue 1,400

13 Wages Expense 1,500

Cash 1,500

15 Wilson, Withdrawals 50
Cash 50

16 Utilities Expense 150

Utilities Payable 150

20 Telephone Expense 175

Telephone Payable 175

22 Accounts Receivable 3,000

Canoe Rental Revenue 3,000

26 Accounts Payable 1,000

Cash 1,000

28 Cash 750
Accounts Receivable 750

30 Wilson, Withdrawals 100

Cash 100

© 2018 Pearson Education, Inc. 2-92

P2-42, cont.
Requirement 1, cont.

Dec. 1 Land 85,000

Building 35,000
Wilson, Capital 120,000

1 Prepaid Rent 3,000

Cash 3,000

2 Canoes 7,200
Notes Payable 7,200

4 Office Supplies 500

Accounts Payable 500

9 Cash 4,500
Canoe Rental Revenue 4,500

15 Accounts Receivable 3,500

Canoe Rental Revenue 3,500

16 Cash 750
Unearned Revenue 750

18 Utilities Payable 150

Telephone Payable 175
Cash 325

19 Accounts Payable 2,000

Cash 2,000

20 Telephone Expense 325

Utilities Expense 295
Telephone Payable 325
Utilities Payable 295

31 Wages Expense 1,800

Cash 1,800

31 Wilson, Withdrawals 300

Cash 300

© 2018 Pearson Education, Inc. 2-93

P2-42, cont.
Requirements 2 and 3

Cash Accounts Payable

Nov. 1 16,000 1,200 Nov. 2 Nov. 26 1,000 4,800 Nov. 3
Nov. 7 1,400 1,500 Nov. 13 Dec. 19 2,000 750 Nov. 4
Nov. 28 750 50 Nov. 15 500 Dec. 4
Dec. 9 4,500 1,000 Nov. 26 3,050 Balance
Dec. 16 750 100 Nov. 30
3,000 Dec. 1
325 Dec. 18
2,000 Dec. 19
1,800 Dec. 31
300 Dec. 31
Balance 12,125

Accounts Receivable Utilities Payable

Nov. 22 3,000 750 Nov. 28 Dec. 18 150 150 Nov. 16
Dec. 15 3,500 295 Dec. 20
Balance 5,750 295 Balance

Office Supplies Telephone Payable

Nov. 4 750 Dec. 18 175 175 Nov. 20
Dec. 4 500 325 Dec. 20
Balance 1,250 325 Balance

Prepaid Rent Unearned Revenue

Dec. 1 3,000 750 Dec. 16
Balance 3,000 750 Balance

Land Notes Payable

Dec. 1 85,000 7,200 Dec. 2
Balance 85,000 7,200 Balance

Building Wilson, Capital

Dec. 1 35,000 16,000 Nov. 1
Balance 35,000 120,000 Dec. 1
136,000 Balance

Canoes Wilson, Withdrawals

Nov. 3 4,800 Nov. 15 50
Dec. 2 7,200 Nov. 30 100
Balance 12,000 Dec. 31 300
Balance 450

© 2018 Pearson Education, Inc. 2-94

P2-42, cont.
Requirements 2 and 3, cont.

Canoe Rental Revenue

1,400 Nov. 7
3,000 Nov. 22
4,500 Dec. 9
3,500 Dec. 15
12,400 Balance

Rent Expense
Nov. 2 1,200
Balance 1,200

Wages Expense
Nov. 13 1,500
Dec. 31 1,800
Balance 3,300

Utilities Expense
Nov. 16 150
Dec. 20 295
Balance 445

Telephone Expense
Nov. 20 175
Dec. 20 325
Balance 500

© 2018 Pearson Education, Inc. 2-95

P2-42, cont.
Requirement 4

CANYON CANOE COMPANY

Trial Balance
December 31, 2018

Account Title Balance

Debit Credit
Cash $ 12,125
Accounts Receivable 5,750
Office Supplies 1,250
Prepaid Rent 3,000
Land 85,000
Building 35,000
Canoes 12,000
Accounts Payable $ 3,050
Utilities Payable 295
Telephone Payable 325
Unearned Revenue 750
Notes Payable 7,200
Wilson, Capital 136,000
Wilson, Withdrawals 450
Canoe Rental Revenue 12,400
Rent Expense 1,200
Wages Expense 3,300
Utilities Expense 445
Telephone Expense 500
Total $ 160,020 $ 160,020

Requirement 5

CANYON CANOE COMPANY

Income Statement
Two Months Ended December 31, 2018

Revenues:
Canoe Rental Revenue $ 12,400
Expenses:
Wages Expense $ 3,300
Rent Expense 1,200
Telephone Expense 500
Utilities Expense 445
Total Expenses 5,445
Net Income $ 6,955

© 2018 Pearson Education, Inc. 2-96

P2-42, cont.
Requirement 6

CANYON CANOE COMPANY

Statement of Owner’s Equity
Two Months Ended December 31, 2018
Wilson, Capital, November 1, 2018 $ 0
Owner contribution 136,000
Net income for the month 6,955
142,955
Owner withdrawals (450)
Wilson, Capital, December 31, 2018 $ 142,505

Requirement 7

CANYON CANOE COMPANY

Balance Sheet
December 31, 2018

Assets Liabilities
Cash $ 12,125 Accounts Payable $ 3,050
Accounts Receivable 5,750 Utilities Payable 295
Office Supplies 1,250 Telephone Payable 325
Prepaid Rent 3,000 Unearned Revenue 750
Land 85,000 Notes Payable 7,200
Building 35,000 Total Liabilities 11,620
Canoes 12,000
Owner’s Equity
Wilson, Capital 142,505
Total Assets $ 154,125 Total Liabilities and Owner’s Equity $ 154,125

Requirement 8

Debt ratio = Total liabilities / Total assets = $11,620 / $154,125 = 0.075* = 7.5%

* rounded

© 2018 Pearson Education, Inc. 2-97

Practice Set
P2-43 Journalizing transactions, posting to T-accounts, and preparing a trial balance

Consider the following transactional data for the first month of operations for Crystal Clear Cleaning.

Nov. 1 Aaron Hideaway contributed $15,000 and a truck, with a market value of $3,000, to
the business in exchange for capital.
2 The business paid $4,000 to Pleasant Properties for November through February rent.
(Debit Prepaid Rent)
3 Paid $4,800 for a business insurance policy for the term November 1, 2018 through
October 31, 2019. (Debit Prepaid Insurance)
4 Purchased cleaning supplies on account, $320.
5 Purchased on account an industrial vacuum cleaner costing $1,500. The invoice is
payable November 25.
7 Paid $3,900 for a computer and printer.
9 Performed cleaning services on account in the amount of $4,700.
10 Received $200 for services rendered on November 9.
15 Paid employees, $400.
16 Received $15,000 for a 1-year contract beginning November 16 for cleaning services
to be provided. Contract begins November 16, 2018, and ends November 15, 2019.
(Credit Unearned Revenue)
17 Provided cleaning services and received $400 cash.
18 Received a utility bill for $175 with a due date of December 4, 2018. (Use Accounts
Payable)
20 Borrowed $36,000 from bank with interest rate of 6% per year.
21 Received $500 on account for services performed on November 9.
25 Paid $750 on account for vacuum cleaner purchased on November 5.
29 Paid $200 for advertising.
30 Hideaway withdrew cash of $1,400 from the business.

Requirements
1. Journalize the transactions, using the following accounts: Cash; Accounts Receivable; Cleaning
Supplies; Prepaid Rent; Prepaid Insurance; Equipment; Truck; Accounts Payable; Unearned
Revenue; Notes Payable; Hideaway, Capital; Hideaway, Withdrawals; Service Revenue; Salaries
Expense; Advertising Expense; and Utilities Expense. Explanations are not required.
2. Open a T-account for each account.
3. Post the journal entries to the T-accounts, and calculate account balances.
4. Prepare a trial balance as of November 30, 2018.

© 2018 Pearson Education, Inc. 2-98

SOLUTION

Requirement 1
Posting
Date Accounts and Explanation Ref. Debit Credit
Nov. 1 Cash 15,000
Truck 3,000
Hideaway, Capital 18,000

2 Prepaid Rent 4,000

Cash 4,000

3 Prepaid Insurance 4,800

Cash 4,800

4 Cleaning Supplies 320

Accounts Payable 320

5 Equipment 1,500
Accounts Payable 1,500

7 Equipment 3,900
Cash 3,900

9 Accounts Receivable 4,700

Service Revenue 4,700

10 Cash 200
Accounts Receivable 200

15 Salaries Expense 400

Cash 400

16 Cash 15,000
Unearned Revenue 15,000

17 Cash 400
Service Revenue 400

18 Utilities Expense 175

Accounts Payable 175

20 Cash 36,000
Notes Payable 36,000

© 2018 Pearson Education, Inc. 2-99

P2-43, cont.

Nov. 21 Cash 500

Accounts Receivable 500

25 Accounts Payable 750

Cash 750

29 Advertising Expense 200

Cash 200

30 Hideaway, Withdrawals 1,400

Cash 1,400

Requirements 2 and 3
Cash Accounts Payable
Nov. 1 15,000 4,000 Nov. 2 Nov. 25 750 320 Nov. 4
Nov. 10 200 4,800 Nov. 3 1,500 Nov. 5
Nov. 16 15,000 3,900 Nov. 7 175 Nov. 18
Nov. 17 400 400 Nov. 15 1,245 Balance
Nov. 20 36,000 750 Nov. 25
Nov. 21 500 200 Nov. 29
1,400 Nov. 30
Balance 51,650

Accounts Receivable Unearned Revenue

Nov. 9 4,700 200 Nov. 10 15,000 Nov. 16
500 Nov. 21 15,000 Balance
Balance 4,000

Cleaning Supplies Notes Payable

Nov. 4 320 36,000 Nov. 20
Balance 320 36,000 Balance

Prepaid Rent Hideaway, Capital

Nov. 2 4,000 18,000 Nov. 1
Balance 4,000 18,000 Balance

Prepaid Insurance Hideaway, Withdrawals

Nov. 3 4,800 Nov. 30 1,400
Balance 4,800 Balance 1,400

© 2018 Pearson Education, Inc. 2-100

P2-43, cont.
Requirements 2 and 3

Equipment Service Revenue

Nov. 5 1,500 4,700 Nov. 9
Nov. 7 3,900 400 Nov. 17
Balance 5,400 5,100 Balance

Truck Salaries Expense

Nov. 1 3,000 Nov. 15 400
Balance 3,000 Balance 400

Advertising Expense
Nov. 29 200
Balance 200

Utilities Expense
Nov. 18 175
Balance 175

© 2018 Pearson Education, Inc. 2-101

P2-43, cont.
Requirement 4

CRYSTAL CLEAR CLEANING

Trial Balance
November 30, 2018

Account Title Balance

Debit Credit
Cash $ 51,650
Accounts Receivable 4,000
Cleaning Supplies 320
Prepaid Rent 4,000
Prepaid Insurance 4,800
Equipment 5,400
Truck 3,000
Accounts Payable $ 1,245
Unearned Revenue 15,000
Notes Payable 36,000
Hideaway, Capital 18,000
Hideaway, Withdrawals 1,400
Service Revenue 5,100
Salaries Expense 400
Advertising Expense 200
Utilities Expense 175
Total $ 75,345 $ 75,345

© 2018 Pearson Education, Inc. 2-102

Critical Thinking
Tying It All Together Case 2-1

Before you begin this assignment, review the Tying It All Together feature in the chapter.

Part of the Fry’s Electronics, Inc.’s experience involves providing technical support to its customers.
This includes in-home installations of electronics and also computer support at their retail store
locations.

Requirements
1. Suppose Fry’s Electronics, Inc. provides $10,500 of computer support at the Dallas-Fort Worth
store during the month of November. How would Fry’s Electronics record this transaction?
Assume all customers paid in cash. What financial statement(s) would this transaction affect?
2. Assume Fry’s Electronics, Inc.’s Modesto, California, location received $24,000 for an annual
contract to provide computer support to the local city government. How would Fry’s Electronics
record this transaction? What financial statement(s) would this transaction affect?
3. What is the difference in how revenue is recorded in requirements 1 and 2? Clearly state when
revenue is recorded in each requirement.

SOLUTION

Requirement 1

Fry’s Electronics would record the following journal entry:

Date Accounts and Explanation Debit Credit

Cash 10,500
Service Revenue 10,500

The transaction would increase assets (Cash) and equity on the balance sheet and increase Service
Revenue on the income statement.

Requirement 2

Fry’s Electronics would record the following journal entry:

Date Accounts and Explanation Debit Credit

Cash 24,000
Unearned Revenue 24,000

The transaction would increase assets (Cash) and increase liabilities (Unearned Revenue) on the balance
sheet.

© 2018 Pearson Education, Inc. 2-103

Requirement 3

In requirement 1, Fry’s Electronics recorded revenue because the company had received the cash from
the customer and provided the service. In requirement 2, Fry’s Electronics recorded a liability, Unearned
Revenue, because even though cash was received, the service has not been provided. The revenue
related to requirement 2 will not be recorded until the service has been provided.

Decision Case 2-1

Your friend, Dean McChesney, requested that you advise him on the effects that certain transactions will
have on his business, A-Plus Travel Planners. Time is short, so you cannot journalize the transactions.
Instead, you must analyze the transactions without a journal. McChesney will continue the business only
if he can expect to earn a monthly net income of $6,000. The business completed the following
transactions during June:
a. McChesney deposited $10,000 cash in a business bank account to start the company. The
company gave capital to McChesney.
b. Paid $300 cash for office supplies.
c. Incurred advertising expense on account, $700.
d. Paid the following cash expenses: administrative assistant’s salary, $1,400; office rent, $1,000.
e. Earned service revenue on account, $8,800.
f. Collected cash from customers on account, $1,200.

Requirements
1. Open the following T-accounts: Cash; Accounts Receivable; Office Supplies; Accounts Payable;
McChesney, Capital; Service Revenue; Salaries Expense; Rent Expense; and Advertising
Expense.
2. Post the transactions directly to the accounts without using a journal. Record each transaction by
letter. Calculate account balances.
3. Prepare a trial balance at June 30, 2018.
4. Compute the amount of net income or net loss for this first month of operations. Would you
recommend that McChesney continue in business?

© 2018 Pearson Education, Inc. 2-104

SOLUTION

Requirements 1 and 2

Cash Accounts Payable

a. 10,000 300 b. 700 c.
f. 1,200 2,400 d. 700 Bal.
Bal. 8,500

Accounts Receivable McChesney, Capital

e. 8,800 1,200 f. 10,000 a.
Bal. 7,600 10,000 Bal.

Office Supplies Service Revenue

b. 300 8,800 e.
Bal. 300 8,800 Bal.

Salaries Expense
d. 1,400
Bal. 1,400

Rent Expense
d. 1,000
Bal. 1,000

Advertising Expense
c. 700
Bal. 700

© 2018 Pearson Education, Inc. 2-105

Decision Case 2-1, cont.
Requirement 3

A-PLUS TRAVEL PLANNERS

Trial Balance
June 30, 2018

Account Title Balance

Debit Credit
Cash $ 8,500
Accounts Receivable 7,600
Office Supplies 300
Accounts Payable $ 700
McChesney, Capital 10,000
Service Revenue 8,800
Salaries Expense 1,400
Rent Expense 1,000
Advertising Expense 700
Total $ 19,500 $ 19,500

Requirement 4

Revenues:
Service Revenue $ 8,800
Expenses:
Salaries Expense $ 1,400
Rent Expense 1,000
Advertising Expense 700
Total Expenses 3,100
Net Income $ 5,700

McChesney should discontinue the business because net income falls below the target amount.

© 2018 Pearson Education, Inc. 2-106

Ethical Issue 2-1

Better Days Ahead, a charitable organization, has a standing agreement with First National Bank. The
agreement allows Better Days Ahead to overdraw its cash balance at the bank when donations are
running low. In the past, Better Days Ahead managed funds wisely and rarely used this privilege. Jacob
Henson has recently become the president of Better Days Ahead. To expand operations, Henson
acquired office equipment and spent large amounts on fundraising. During Henson’s presidency, Better
Days Ahead has maintained a negative bank balance of approximately $10,000.

What is the ethical issue in this situation, if any? State why you approve or disapprove of
Henson’s management of Better Days Ahead’s funds.

SOLUTION

The bank has a standing agreement with Better Days Ahead for overdrafts, so as long as transactions are
compliant with terms of the agreement, there is no ethical issue. The exercise refers to Better Days
Ahead managing funds “wisely.” However, whether funds are managed wisely or not is a matter of
prudent business management and not an ethical issue. Presumably if Better Days Ahead was exceeding
the terms of the agreement, the bank would cancel the arrangement.

Some students may point out that the agreement was for times when donations were running low,
whereas the reasons given for the overdraft are for expansion and fundraising. If this is interpreted to
mean that Better Days Ahead is abusing the privilege according to the terms of the agreement, then there
may be an ethical issue involved, but that is not made clear by the information given.

Students may approve of Henson’s cash management if the arrangement is beneficial to Better Days
Ahead, and thus helps them accomplish their charitable mission more effectively. Students may
disapprove of Henson’s cash management if (a) they feel it is “unwise” (poor business management), or
(b) if they believe he is exceeding the terms of the agreement.

Fraud Case 2-1

Roy Akins was the accounting manager at Zelco, a tire manufacturer, and he played golf with Hugh
Stallings, the CEO, who was something of a celebrity in the community. The CEO stood to earn a
substantial bonus if Zelco increased net income by year-end. Roy was eager to get into Hugh’s elite
social circle; he boasted to Hugh that he knew some accounting tricks that could increase company
income by simply revising a few journal entries for rental payments on storage units. At the end of the
year, Roy changed the debits from “rent expense” to “prepaid rent” on several entries. Later, Hugh got
his bonus, and the deviations were never discovered.

Requirements
1. How did the change in the journal entries affect the net income of the company at year-end?
2. Who gained and who lost as a result of these actions?

© 2018 Pearson Education, Inc. 2-107

SOLUTION

Requirement 1
By changing an expense to an asset, the total expenses will decrease and net income will increase.

Requirement 2
The CEO gained by earning a bonus, and the accounting manager may have gained by getting favorable
treatment from the CEO. The company lost, because the company paid out the bonus under fraudulent
conditions.

Financial Statement Case 2-1

Refer to http://www.pearsonhighered.com/Horngren to view a link to Target Corporation’s Fiscal

2015 Annual Report.

Requirements
1. Calculate the debt ratio for Target Corporation as of January 30, 2016.
2. How did the debt ratio for Target Corporation compare to the debt ratio for Kohl’s
Corporation? Discuss.

SOLUTION

Requirement 1

Debt ratio = Total liabilities / Total assets

= $27,305 (in millions) / $40,262 (in millions)
= 0.678* = 67.8%
* rounded

Requirement 2

Target’s debt ratio is significantly higher than Kohl’s (59.6%).

Communication Activity 2-1

In 35 words or fewer, explain the difference between a debit and a credit, and explain what the
normal balance of the six account types is.

SOLUTION

Debits are on the left, credits are on the right. Normal balance for assets, expenses, and Owner’s
Withdrawals is a debit. For liability, Owner’s Capital, and revenue accounts, the normal balance is a
credit.

© 2018 Pearson Education, Inc. 2-108