Spiceland C2 Solutions.docx
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Spiceland C2 Solutions.docx
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Chapter2ReviewoftheAccountingProcess
QuestionsforReviewofKeyTopics
Question2-1
Externaleventsinvolveanexchangetransactionbetweenthecompanyandaseparateeconomicentity.Foreveryexternaltransaction,thecompanyisreceivingsomethinginexchangeforsomethingelse.Internaleventsdonotinvolveanexchangetransactionbutdoaffectthefinancialpositionofthecompany.Examplesofexternaleventsarethepurchaseofinventory,asaletoacustomer,andtheborrowingofcashfromabank.Examplesofinternaleventsincludetherecordingofdepreciationexpense,theexpirationofprepaidrent,andtheaccrualofsalaryexpense.
Question2-2
Accordingtotheaccountingequation,thereisequalitybetweenthetotaleconomicresourcesofanentity,itsassets,andtheclaimstothoseresources,liabilitiesandequity.Thisimpliesthat,sinceresourcesmustalwaysequalclaims,theneteffectofanytransactioncannotaffectonesideoftheaccountingequationdifferentlythantheotherside.
Question2-3
Thepurposeofajournalistocapture,inchronologicalorder,thedualeffectofatransaction.Ageneralledgerisacollectionofstorageareascalledaccounts.Theseaccountskeeptrackoftheincreasesanddecreasesineachelementoffinancialposition.
Question2-4
Permanentaccountsrepresentthefinancialpositionofacompany-assets,liabilitiesandowners'equity-ataparticularpointintime.Temporaryaccountsrepresentthechangesinshareholders’equity,theretainedearningscomponentofequityforacorporation,causedbyrevenue,expense,gain,andlosstransactions.Itwouldbecumbersometorecordrevenue/expense,gain/losstransactionsdirectlyintothepermanentretainedearningsaccount.Recordingthesetransactionsintemporaryaccountsfacilitatesthepreparationofthefinancialstatements.
Question2-5
Assetsareincreasedbydebitsanddecreasedbycredits.Liabilitiesandequityaccountsareincreasedbycreditsanddecreasedbydebits.
Question2-6
Revenuesandgainsareincreasedbycreditsanddecreasedbydebits.Expensesandlossesareincreasedbydebits(thuscausingowners’equitytodecrease)anddecreasedbycredits(thuscausingowners’equitytoincrease).
AnswerstoQuestions(continued)
Question2-7
Thefirststepintheprocessingcycleistoidentifyexternaltransactionsaffectingtheaccountingequation.Sourcedocuments,suchassalesinvoices,billsfromsuppliersandcashregistertapes,helptoidentifythetransactionsandthenprovidetheinformationnecessarytoprocessthetransaction.
Question2-8
Transactionanalysisistheprocessofreviewingthesourcedocumentstodeterminethedualeffectontheaccountingequationandthespecificelementsinvolved.
Question2-9
Aftertransactionsarerecordedinajournal,thedebitsandcreditsmustbetransferredtotheappropriategeneralledgeraccounts.Thistransferiscalledposting.
Question2-10
Transaction1recordsthepurchaseof$20,000ofinventoryonaccount.Transaction2recordsacreditsaleof$30,000andthecorrespondingcostofgoodssoldof$18,000.
Question2-11
Anunadjustedtrialbalanceisalistofthegeneralledgeraccountsandtheirbalancesatatimebeforeanyend-of-periodadjustingentrieshavebeenrecorded.Anadjustedtrialbalanceispreparedafteradjustingentrieshavebeenrecordedandpostedtotheaccounts.
AnswerstoQuestions(continued)
Question2-12
Adjustingentriesrecordtheeffectonfinancialpositionofinternalevents,thosethatdonotinvolveanexchangetransactionwithanotherentity.Theymustberecordedattheendofanyperiodwhenfinancialstatementsarepreparedtoproperlyreflectfinancialpositionandresultsofoperationsaccordingtotheaccrualaccountingmodel.
Question2-13
Closingentriestransferthebalancesinthetemporaryowners’equityaccountstoapermanentowners’equityaccount,retainedearningsforacorporation.Thisisdoneonlyattheendofafiscalyearinordertoreducethetemporaryaccountstozerobeforebeginningthenextreportingyear.
Question2-14
Prepaidexpensesrepresentassetsrecordedwhenacashdisbursementcreatesbenefitsbeyondthecurrentreportingperiod.Examplesaresuppliesonhandattheendofaperiod,prepaidrent,andthecostofplantandequipment.
Question2-15
Theadjustingentryrequiredwhenunearnedrevenuesareearnedisadebittotheunearnedrevenueliabilityandacredittorevenue.
Question2-16
Accruedliabilitiesarerecordedwhenanexpensehasbeenincurredthatwillnotbepaiduntilasubsequentreportingperiod.Theadjustingentryrequiredtorecordanaccruedliabilityisadebittoanexpenseandacredittoaliability.
AnswerstoQuestions(continued)
Question2-17
Incomestatement-Thepurposeoftheincomestatementistosummarizetheoperatingactivitiesofthecompanyduringaparticularperiodoftime.Itisachangestatementthatisreportingthechangesinowners’equitythatoccurredduringtheperiodasaresultofoperatingtransactions(revenues,expenses,gainsandlosses).
Balancesheet-Thepurposeofthebalancesheetistopresentthefinancialpositionofthecompanyataparticularpointintime.Itisanorganizedarrayofassets,liabilities,andpermanentowners’equityaccounts.
Statementofcashflows-Thepurposeofthestatementofcashflowsistodisclosetheeventsthatcausedcashtochangeduringtheperiod.
Statementofshareholders’equity-Thepurposeofthestatementofshareholders’equityistodisclosethesourcesofthechangesinthevariouspermanentshareholders’equityaccountsthatoccurredduringtheperiod.
Question2-18
Aworksheetprovidesameansoforganizingtheaccountinginformationneededtoprepareadjustingandclosingentriesandthefinancialstatements.Thiserrorwouldresultinanoverstatementofrevenueandthusnetincomeandretainedearnings,andanunderstatementofliabilities.
Question2-19
Reversingentriesarerecordedatthebeginningofareportingperiod.Theyremovetheeffectsofsomeoftheadjustingentriesmadeattheendofthepreviousreportingperiod.Thissimplifiesthejournalentriesmadeduringthenewperiodbyallowingcashpaymentsorcashreceiptstobeentereddirectlyintotheexpenseorrevenueaccountwithoutregardtotheaccrualmadeattheendofthepreviousperiod.
Question2-20
Thepurposeofspecialjournalsistorecord,inchronologicalorder,thedualeffectofrepetitivetypesoftransactions,suchascashreceipts,cashdisbursements,creditsalesandcreditpurchases.
Specialjournalssimplifytherecordingprocessinthefollowingways:
(1)journalizingtheeffectsofaparticulartransactionismademoreefficientthroughtheuseofspecificallydesignedformats,
(2)individualtransactionsarenotpostedtothegeneralledgeraccounts,butareaccumulatedinthespecialjournalsandasummarypostingismadeonaperiodicbasis,and(3)theresponsibilityforrecordingjournalentriesfortherepetitivetypesoftransactionsisplacedonindividualswhohavespecializedtraininginhandlingthem.
AnswerstoQuestions(concluded)
Question2-21
Thegeneralledgerisacollectionofcontrolaccountsrepresentingassets,liabilities,permanentandtemporaryshareholders’equityaccounts.Thesubsidiaryledgercontainsagroupofsubsidiaryaccountsassociatedwithaparticulargeneralledgercontrolaccount.Forexample,therewillbeasubsidiaryledgerforaccountsreceivablethatwillkeeptrackoftheincreasesanddecreasesintheaccountreceivablebalanceforeachofthecompany’scustomerspurchasinggoodsorservicesoncredit.Atanypointintime,thebalanceintheaccountsreceivablecontrolaccountshouldequalthesumofthebalancesintheaccountsreceivablesubsidiaryledgeraccounts.
BRIEFExercises
BriefExercise2-1
Assets=Liabilities+Paid-inCapital+RetainedEarnings
1.+165,000(inventory)+165,000(accountspayable)
2.-40,000(cash)-40,000(expense)
3.+200,000(accountsreceivable)+200,000(revenue)
-120,000(inventory)-120,000(expense)
4.+180,000(cash)
-180,000(accountsreceivable)
5.-145,000(cash)-145,000(accountspayable)
BriefExercise2-2
1.Inventory165,000
Accountspayable165,000
2.Salariesexpense40,000
Cash40,000
3.Accountsreceivable200,000
Salesrevenue200,000
Costofgoodssold120,000
Inventory120,000
4.Cash180,000
Accountsreceivable180,000
5.Accountspayable145,000
Cash145,000
BriefExercise2-3
balancesheetAccounts
CashAccountsreceivable
6/1Bal.65,0006/1Bal.43,000
4.180,00040,0002.3.200,000180,0004.
145,0005.
6/30Bal.60,0006/30Bal.63,000
InventoryAccountspayable
6/1Bal.06/1Bal.22,000
1.165,000120,0003.5.145,000165,0001.
6/30Bal.45,0006/30Bal.42,000
InCOMESTATEMENTAccounts
SalesrevenueCostofgoodssold
06/1Bal.6/1Bal.0
200,0003.3.120,000
200,0006/30Bal.6/30Bal.120,000
Salariesexpense
6/1Bal.0
2.40,000
6/30Bal.40,000
BriefExercise2-4
1.Prepaidinsurance12,000
Cash12,000
2.Notereceivable10,000
Cash10,000
3.Equipment60,000
Cash60,000
BriefExercise2-5
1.Insuranceexpense($12,000x3/12)3,000
Prepaidinsurance3,000
2.Interestreceivable($10,000x6%x6/12)300
Interestrevenue300
3.Depreciationexpense12,000
Accumulateddepreciation-equipment12,000
BriefExercise2-6
Netincomewouldbehigherby$14,700($3,000-300+12,000).
BriefExercise2-7
1.Servicerevenue4,000
Unearnedservicerevenue4,000
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