Chapter 3: ANSWERS TO QUESTIONS

1.

The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

2.

Yes, a business can enter into a transaction in which only the left side of the accounting equation
is affected. An example would be a transaction where an increase in one asset is offset by a
decrease in another asset. An increase in the equipment account which is offset by a decrease in
the cash account is a specific example.

3.

Accounting transactions are the economic events of the company recorded by accountants because
they affect the basic accounting equation.
(a) The death of a major stockholder of the company is not an accounting transaction as it does not
affect the basic accounting equation.
(b) Supplies purchased on account is an accounting transaction because it affects the basic
accounting equation.
(c) An employee being fired is not an accounting transaction as it does not affect the basic
accounting equation.
(d) Paying a cash dividend to stockholders is an accounting transaction as it does affect the
basic accounting equation.

4.

(a)
(b)
(c)
(d)

Decrease assets and decrease stockholders equity.

Increase assets and decrease assets.
Increase assets and increase stockholders equity.
Decrease assets and decrease liabilities.

5.

An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit
side. Because the alignment of these parts resembles the letter T, it is referred to as a T account.

6.

Disagree. The terms debit and credit are synonymous with left and right, respectively.

7.

Terry is incorrect. The double-entry system merely records the dual (two-sided) effect of a transaction
on the accounting equation. A transaction is not recorded twice; it is recorded once, and must
affect two or more accounts to keep the basic accounting equation in balance. In other words, for
each transaction, debits must equal credits.

8.

Misty is incorrect. A debit balance only means that debit amounts exceed credit amounts in an
account. Conversely, a credit balance only means that credit amounts are greater than debit amounts
in an account. Thus, a debit or credit balance is neither favorable or unfavorable.

9.

(a) Asset accounts are increased by debits and decreased by credits.

(b) Liability accounts are decreased by debits and increased by credits.
(c) The common stock account is decreased by debits and increased by credits.

Copyright 2013 John Wiley & Sons, Inc.Kimmel, Accounting, 5/e, Solutions Manual(For Instructor Use Only)

3-1

Questions Chapter 3 (Continued)

10.

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Accounts Receivabledebit balance.

Cashdebit balance.
Dividendsdebit balance.
Accounts Payablecredit balance.
Service Revenuecredit balance.
Salaries and Wages Expensedebit balance.
Common Stockcredit balance.

11.

(a)
(b)
(c)
(d)
(e)

Accounts Receivableassetdebit balance.

Accounts Payableliabilitycredit balance.
Equipmentassetdebit balance.
Dividendsstockholders equitydebit balance.
Suppliesassetdebit balance.

12.

(a) Debit Supplies and credit Accounts Payable.

(b) Debit Cash and credit Notes Payable.
(c) Debit Salaries and Wages Expense and credit Cash.

13.

(a)
(b)
(c)
(d)
(e)
(f)

14.

Normal balances for accounts in Tootsie Rolls financial statements: Accounts Receivabledebit;
Income Taxes Payablecredit; Salescredit; Selling, Marketing, and Administrative Expenses
debit.

15.

The basic steps in the recording process are:

(1) Analyze each transaction in terms of its effect on the accounts.
(2) Enter the transaction information in a journal.
(3) Transfer the journal information to the appropriate accounts in the ledger.

16.

(a) The debit should be entered first.

(b) The credit should be indented.

17.

(a) No, debits and credits should not be recorded directly in the ledger.
(b) The advantages of using the journal are:
(1) It discloses in one place the complete effect of a transaction.
(2) It provides a chronological record of all transactions.
(3) It helps to prevent or locate errors because the debit and credit amounts for each entry
can be readily compared.

18.

(a) Cash......................................................................................................... 12,000

Common Stock..................................................................................
(Issued stock for cash)

Cashboth debit and credit entries.

Accounts Receivableboth debit and credit entries.
Dividendsdebit entries only.
Accounts Payableboth debit and credit entries.
Salaries and Wages Expensedebit entries only.
Service Revenuecredit entries only.

(b) Prepaid Insurance.....................................................................................

Cash..................................................................................................
(Paid one-year insurance policy)

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800

12,000

800

3-2

Questions Chapter 3 (Continued)

(c)

Supplies....................................................................................................
Accounts Payable..............................................................................
(Purchased supplies on account)

1,800

(d) Cash.........................................................................................................
Service Revenue...............................................................................
(Received cash for services rendered)

7,500

1,800

7,500

19.

(a) The entire group of accounts maintained by a company, including all the asset, liability, and
stockholders equity accounts, is referred to collectively as the ledger.
(b) The chart of accounts is important, particularly for a company that has a large number of
accounts, because it helps organize the accounts and identify their location in the ledger.

20.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a
trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing
and posting. In addition, it is useful in preparing financial statements.

21.

The proper sequence is as follows:

(b) Accounting transaction occurs.
(c) Information is entered in the journal.
(a) Debits and credits are posted to the ledger.
(e) Trial balance is prepared.
(d) Financial statements are prepared.

22.

(a) The trial balance would balance.

(b) The trial balance would not balance since the debits would be $720 higher than the credits.

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3-3

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3-1
(a)
(b)
(c)

Assets
+
+

Liabilities
+
NE
NE

Stockholders Equity
NE
+

BRIEF EXERCISE 3-2

Cash
(1)

+$60,000

(2)

9,000

(3)

+13,000

Assets
=
Liabilities
+ Stockholders Equity
Accounts
Accounts
Bonds
Common
Retained
+ Receivable + Supplies = Payable + Payable + Stock + Earnings
+$60,000
$9,000

Paid div.

$13,000

(4)

+$3,100

+$3,100

BRIEF EXERCISE 3-3

Assets
Cash
(1)

$286,176

(2)

+137,590

(3)

+ Inventory +

Equipment

Liabilities

Stockholders Equity

Accounts
Payable

Common
Stock

Retained
Earnings

+$286,176
+$137,590
+$68,480

Issued stock

+$68,480

BRIEF EXERCISE 3-4

(a)
(b)
(c)
(d)
(e)
(f)

Accounts Payable
Advertising Expense
Service Revenue
Accounts Receivable
Retained Earnings
Dividends

Debit
Effect
Decrease
Increase
Decrease
Increase
Decrease
Increase

Credit
Effect
Increase
Decrease
Increase
Decrease
Increase
Decrease

Copyright 2013 John Wiley & Sons, Inc.Kimmel, Accounting, 5/e, Solutions Manual(For Instructor Use Only)

Normal
Balance
Credit
Debit
Credit
Debit
Credit
Debit

3-4

BRIEF EXERCISE 3-5

June 1
2

Account Debited
Cash
Equipment
Rent Expense
Accounts Receivable

Account Credited
Common Stock
Accounts Payable
Cash
Service Revenue

3
12
BRIEF EXERCISE 3-6
June 1

Cash.......................................................................
Common Stock..............................................

5,000

Equipment.............................................................
Accounts Payable.........................................

1,100

Rent Expense........................................................
Cash...............................................................

740

12

Accounts Receivable............................................
Service Revenue...........................................

700

5,000
1,100
740
700

BRIEF EXERCISE 3-7

The basic steps in the recording process are:
1.

Analyze each transaction. In this step, source documents are examined to determine the effects of the transaction on the accounts.

2.

Enter each transaction in a journal. This step is called journalizing and

it results in making a chronological record of the transactions.

3.

Transfer journal information to ledger accounts. This step is called

posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.

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3-5

BRIEF EXERCISE 3-8

(a) Basic Analysis

(b)

Debit-Credit Analysis

Aug. 1

The asset Cash is increased;

the stockholders equity
account Common Stock is
increased.

Debits increase assets:

debit Cash $10,000. Credits
increase stockholders equity:
credit Common Stock $10,000.

The asset Prepaid Insurance

is increased; the asset Cash
is decreased.

Debits increase assets:

debit Prepaid Insurance $1,500.
Credits decrease assets:
credit Cash $1,500.

16

The asset Cash is increased;

the revenue Service Revenue
is increased.

Debits increase assets:

debit Cash $900.
Credits increase revenues:
credit Service Revenue $900.

27

The expense Salaries and

Wages Expense is increased;
the asset Cash is decreased.

Debits increase expenses:

debit Salaries and Wages
Expense $620.
Credits decrease assets:
credit Cash $620.

BRIEF EXERCISE 3-9

Aug. 1

Cash.......................................................................
Common Stock..............................................

10,000

Prepaid Insurance.................................................
Cash................................................................

1,500

16

Cash.......................................................................
Service Revenue............................................

900

27

Salaries and Wages Expense...............................

Cash................................................................

620

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10,000
1,500
900
620

3-6

BRIEF EXERCISE 3-10

5/12
5/15

5/5

Cash
1,600
2,000

Service Revenue
5/5
5/15

3,800
2,000

Accounts Receivable
3,800 5/12
1,600

BRIEF EXERCISE 3-11

YEAGER COMPANY
Trial Balance
June 30, 2014

Cash.............................................................................
Accounts Receivable..................................................
Equipment....................................................................
Accounts Payable.......................................................
Common Stock............................................................
Dividends.....................................................................
Service Revenue.........................................................
Salaries and Wages Expense.....................................
Rent Expense..............................................................

Debit
$5,400
3,000
13,000
1,200
4,000
1,000
$27,600

Copyright 2013 John Wiley & Sons, Inc.Kimmel, Accounting, 5/e, Solutions Manual(For Instructor Use Only)

Credit

$1,000
18,000
8,600
$27,600

3-7

BRIEF EXERCISE 3-12

CINELLI COMPANY
Trial Balance
December 31, 2014

Cash.............................................................................
Prepaid Insurance.......................................................
Accounts Payable.......................................................
Unearned Service Revenue........................................
Common Stock............................................................
Retained Earnings.......................................................
Dividends.....................................................................
Service Revenue.........................................................
Salaries and Wages Expense.....................................
Rent Expense..............................................................

Debit
$20,800
3,500

5,000
14,600
2,600
$46,500

Copyright 2013 John Wiley & Sons, Inc.Kimmel, Accounting, 5/e, Solutions Manual(For Instructor Use Only)

Credit
$2,500
1,800
10,000
6,600
25,600
$46,500

3-8

SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 3-1
Assets
=
Accounts
Cash
+ Receivable =
(1)
(2)

+
+

Common
Stock

+$20,000
+$20,000

(3)
(4)

Liabilities
Accounts
Payable

Stockholders Equity
Retained Earnings
+ Revenues Expenses Dividends
+$20,000

20,000
+$1,800

$1,800

3,000

$3,000

DO IT! 3-2
Joel would likely need the following accounts in which to record the transactions necessary to ready his photography studio for opening day:
Cash (debit balance)
Supplies (debit balance)
Notes Payable (credit balance)

Equipment (debit balance)

Accounts Payable (credit balance)
Common Stock (credit balance)

DO IT! 3-3
Each transaction that is recorded is entered in the general journal. The
three activities would be recorded as follows:
1.

Cash...........................................................................
Common Stock..................................................

8,000

2.

Supplies .....................................................................
Accounts Payable..............................................
Cash....................................................................

950

3.

No entry because no transaction has occurred.

8,000
550
400

DO IT! 3-4
4/1
4/3
4/30

Cash
1,900 4/16
3,400 4/20
4,500

500
300

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3-9

SOLUTIONS TO EXERCISES
EXERCISE 3-1
1.
2.
3.
4.
5.
6.
7.
8.
9.

Increase in assets and increase in stockholders equity.

Decrease in assets and decrease in stockholders equity.
Increase in assets and increase in stockholders equity.
Increase in assets and increase in stockholders equity.
Decrease in assets and decrease in stockholders equity.
Increase in liabilities and decrease in stockholders equity.
Increase in assets and decrease in assets.
Increase in assets and decrease in assets.
Increase in assets and increase in liabilities.

EXERCISE 3-2
Assets
Cash
(1)

Accounts
Receivable + Equipment =

Accounts
Payable

Stockholders Equity
Common
Retained Earnings
Stock + Revenues Expenses
+$40,000

+$30,000

Issued Stock

+$30,000

$ 4,000

(4)

$4,000
+$19,000

(5)

+5,000

(6)

8,000

(7)

30,000

+$19,000

Service Revenue

+5,000

Service Revenue

+1,300
+12,000
$15,000 +

Rent Expense

8,000

Utilities Expense

1,300

Advertising Expense

30,000

(8)
(9)

+40,000

(2)
(3)

Liabilities

12,000
$7,000

$52,000

$30,000

$ 1,300

$40,000 +

$24,000

$13,300

$52,000

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3-10

EX
ER
CIS
E
3-3

Copyri
ght
2013
John
Wiley
&
Sons,
Inc.

Kimm
el,
Accou
nting,
5e,
Solutio
ns
Manua
l
(For
Instruc
tor
Use
Only)

Cash

Assets
Accounts
+ Receivable + Supplies +

Equipment

Liabilities
Accounts
Bonds
= Payable + Payable

+
Common
+
Stock

(1) +$100,000
(2)

+45,000

(3)

60,000

(4)

+16,000

Dividends
Issued Stock

+$45,000
+$60,000
+$16,000
+$4,700

Service Revenue

+$4,700

5,200

(7)
(8)

+ Revenues Expenses

+$100,000

(5)
(6)

Stockholders Equity
Retained Earnings

$5,200
+$10,000

Rent Expense

+10,000

28,000

Service Revenue
28,000

Salaries and
Wages Expense

3-11

(9)

11,000
$ 56,800 +

$11,000
$10,000

$4,700

$131,500

$60,000

$4,700

$45,000 +

$100,000 +

+$26,000

$131,500

$33,200

$11,000

Dividends

EXERCISE 3-4
(a) 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Stockholders invested $20,000 cash in the business.

Purchased equipment for $5,000, paying $1,000 in cash and the
balance of $4,000 on account.
Paid $750 cash for supplies.
Earned $9,500 in revenue, receiving $4,100 cash and $5,400 on
account.
Paid $1,500 cash on accounts payable.
Paid $2,000 cash dividends to stockholders.
Paid $800 cash for rent.
Collected $450 cash from customers on account.
Paid salaries of $3,000.
Incurred $300 of utilities expense on account.

(b) Issued common stock..............................................................

Service revenue........................................................................
Dividends..................................................................................
)
Rent expense............................................................................
)
Salaries and wages expense...................................................
Utilities expense.......................................................................
)
Increase in stockholders equity.............................................

$20,000
9,500
(2,000

(c) Service revenue........................................................................

Rent expense............................................................................
Salaries and wages expense...................................................
Utilities expense.......................................................................
Net income................................................................................

$9,500
(800)
(3,000)
(300)
$5,400

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(800
(3,000)
(300
$23,400

3-12

EXERCISE 3-5
COLAW COMPANY
Income Statement
For the Month Ended August 31, 2014
Revenues
Service revenue.........................................................
Expenses
Salaries and wages expense....................................
Rent expense.............................................................
Utilities expense........................................................
Total expenses...................................................
Net income........................................................................

$9,500
$3,000
800
300

4,100
$5,400

COLAW COMPANY
Retained Earnings Statement
For the Month Ended August 31, 2014
Retained earnings, August 1..............................................................
Add: Net income................................................................................
Less: Dividends..................................................................................
Retained earnings, August 31............................................................

$ 0
5,400
5,400
2,000
$3,400

COLAW COMPANY
Balance Sheet
August 31, 2014
Assets

Current assets
Cash............................................................................
Accounts receivable..................................................
Supplies......................................................................
Total current assets...............................................
Equipment......................................................................
Total assets.............................................................

$15,500
4,950
750

$21,200
5,000
$26,200

Liabilities and Stockholders Equity

Current liabilities
Accounts payable......................................................
Stockholders equity
Common stock...........................................................

$2,800
$20,000

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3-13

3-14
Copyri
ght
2013
John
Wiley
&
Sons,
Inc.

Kimm
el,
Accou
nting,
5/e,
Solutio
ns
Manua
l
(For
Instruc

Retained earnings......................................................
Total liabilities and stockholders equity.....

tor
Use
Only)

(a)

Account Debited
(b)
(c)
Specific
Account
Effect

3,400

EX
ER
23,400CIS
$26,200E
3-6

(d)
Normal
Balance

(a)
Basic
Type

Accoun
(b)
Speci
Accou

Comm
Stoc

Transaction

(a)
Basic
Type

1.

Asset

Cash

Increase

Debit

Stockholders
Equity

2.

Asset

Equipment

Increase

Debit

Asset

3.

Asset

Supplies

Increase

Debit

Liability

Accou
Payab

4.

Asset

Accounts
Receivable

Increase

Debit

Stockholders
Equity

Servic
Reven

5.

Stockholders
Equity

Advertising
Expense

Increase

Debit

Asset

Cash

6.

Asset

Cash

Increase

Debit

Asset

Accou
Receiva

7.

Liability

Accounts
Payable

Decrease

Credit

Asset

Cash

8.

Stockholders
Equity

Dividends

Increase

Debit

Asset

Cash

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Cash

3-14

EXERCISE 3-6 (Continued)

(b)

General Journal

Trans.
1.

Account Titles
Debit
Cash..................................................................... 15,000
Common Stock............................................

15,000

2.

Equipment........................................................... 10,000
Cash.............................................................

10,000

3.

Supplies............................................................... 300
Accounts Payable.......................................

300

4.

Accounts Receivable.......................................... 3,700

Service Revenue.........................................

3,700

5.

Advertising Expense.......................................... 200

Cash.............................................................

200

6.

Cash..................................................................... 1,100
Accounts Receivable..................................

1,100

7.

Accounts Payable............................................... 300

Cash.............................................................

300

8.

Dividends............................................................ 400
Cash.............................................................

400

EXERCISE 3-7
Oct. 1

Debits increase assets:debit Cash $30,000.

Credits increase stockholders equity:credit Common
Stock
$30,000.

No accounting transaction.

Debits increase assets:debit Equipment $3,800.

Credit

Credits increase liabilities:credit Accounts Payable $3,800.

EXERCISE 3-7 (Continued)

Oct. 6

Debits increase assets:debit Accounts Receivable $10,800.

Credits increase revenues:credit Service Revenue $10,800.

10

Debits increase assets:debit Cash $140.

Credits increase revenues:credit Service Revenue $140.

27

Debits decrease liabilities:debit Accounts Payable $700.

Credits decrease assets:credit Cash $700.

30

Debits increase expenses:debit Salaries and Wages

Expense $3,000.
Credits decrease assets:credit Cash $3,000.

EXERCISE 3-8
Date
Oct. 1

General Journal

Account Titles
Debit
Cash.................................................................... 30,000
Common Stock..........................................

Credit
30,000

No entry.

Equipment.......................................................... 3,800
Accounts Payable......................................

3,800

Accounts Receivable........................................ 10,800

Service Revenue........................................

10,800

10

Cash.................................................................... 140
Service Revenue........................................

140

27

Accounts Payable.............................................. 700

Cash............................................................

700

30

Salaries and Wages Expense........................... 3,000

Cash............................................................

3,000

EXERCISE 3-9
General Journal

Date
May 4

Account Titles
Accounts Payable..............................................
Cash............................................................

Debit
700

Accounts Receivable........................................
Service Revenue........................................

6,800

Supplies.............................................................
Accounts Payable......................................

850

Equipment..........................................................
Cash............................................................

1,000

17

Salaries and Wages Expense...........................

Cash............................................................

530

22

Maintenance and Repairs Expense.................

Accounts Payable......................................

900

29

Prepaid Insurance.............................................
Cash............................................................

1,200

Credit
700
6,800
850
1,000
530
900
1,200

EXERCISE 3-10
(a)
Oct. 1
10
Bal.

Cash
30,000 Oct. 27
140
30
26,440

Accounts Receivable
Oct. 6
10,800
Bal.
10,800
Oct. 3
Bal.

Equipment
3,800
3,800

700
3,000

Accounts Payable
Oct. 27
700 Oct. 3
Bal.
Common Stock
Oct. 1
Bal.

3,800
3,100

30,000
30,000

Service Revenue
Oct. 6 10,800
10
140
Bal.
10,940
Salaries and Wages Expense
Oct. 30
3,000
Bal.
3,000

(b)

CROFOOT REAL ESTATE AGENCY

Trial Balance
October 31, 2014

Cash......................................................................
Accounts Receivable..........................................
Equipment............................................................
Accounts Payable................................................
Common Stock....................................................
Service Revenue..................................................
Salaries and Wages Expense.............................

Debit
$26,440
10,800
3,800

3,000
$44,040

Credit

$3,100
30,000
10,940

.
$44,040