Demonstration Problem

1. Accounting What the Numbers Mean 9e Demonstration Problem Chapter 4 – Exercise 7 Record Transaction and Adjustments

2. Problem Definition • Enter the following column heading across the top of a sheet of paper: Transaction/ Owners’ Net Situation Assets Liabilities Equity Income

3. Problem Definition • Enter the following column heading across the top of a sheet of paper: Transaction/ Owners’ Net Situation Assets Liabilities Equity Income Enter the transaction/situation number in the first column and show the effect, if any, of the transaction entry or adjusting entry on the appropriate balance sheet category or on the income statement by entering the amount and indicating whether it is an addition (+) or a subtraction (-). Column headings reflect the expanded balance sheet equation; items that affect net income should not be shown as affecting owners’ equity. In some cases, only one column may be affected because all of the specific accounts affected by the transaction are included in that category. Transaction a has been done as an illustration. (Note: As an alternative to using the horizontal model, you may write the journal entry for each transaction or adjustment.)

4. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

5. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income a. +550 +550

6. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income a. +550 +550 Journal entry: Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550 Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . . $550

7. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income a. +550 +550 Journal entry: Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550 Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . . $550 Accounts receivable (an asset account) increases and Service Revenue (a revenue account) also increases which causes Net Income to increase.

8. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

9. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income b. -360 +360

10. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income b. -360 +360 Journal entry: Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . $360 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360

11. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income b. -360 +360 Journal entry: Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . $360 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360 Prepaid Insurance (an asset account) increases and Cash (an asset account) decreases. No effect on Net Income.

12. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

13. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income c. -30 -30

14. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income c. -30 -30 Journal entry: Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . $30 Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . $30

15. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income c. -30 -30 Journal entry: Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . $30 Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . $30 Insurance Expense (an expense account) increases which causes Net Income to decrease; Prepaid Insurance (an asset account) decreases.

16. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

17. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income d. -800 -800

18. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income d. -800 -800 Journal entry: Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800

19. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income d. -800 -800 Journal entry: Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 Wages Payable (a liability account) decreases and Cash (an asset account) also decreases. No effect on Net Income.

20. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

21. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income e. -2,600 -2,600

22. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income e. -2,600 -2,600 Journal entry: Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600

23. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income e. -2,600 -2,600 Journal entry: Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600 Wages Expense (an expense account) increases which causes Net Income to decrease; Cash (an asset account) decreases.

24. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

25. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income f. +600 -600

26. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income f. +600 -600 Journal entry: Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600 Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . $600

27. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income f. +600 -600 Journal entry: Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600 Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . $600 Wages Expense (an expense account) increases which causes Net Income to decrease; Wages Payable (a liability account) increases.

28. Problem Definition • Provided services to a client on account; revenues totaled $550. • Paid an insurance premium of $360 for the coming year. An asset, Prepaid Insurance, was debited. • Recognized insurance expense for one month from the above premium via a reclassification adjusting entry. • Paid $800 of wages accrued at the end of the prior month. • Paid $2,600 of wages for the current month. • Accrued $600 of wages at the end of the current month. • Received cash of $1,500 on accounts receivable accrued at the end of the prior month.

29. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income g. +1,500 -1,500

30. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income g. +1,500 -1,500 Journal entry: Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500 Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . . $1,500

31. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income g. +1,500 -1,500 Journal entry: Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500 Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . . $1,500 Cash (an asset account) increases and Accounts Receivable (an asset account) decreases. No effect on Net Income.

32. Problem Solution Transaction/ Owners’ Net Situation Assets Liabilities Equity Income a. +550 +550 b. -360 +360 c. -30 -30 d. -800 -800 e. -2,600 -2,600 f. +600 -600 g. +1,500 -1,500

33. Problem Solution Journal entries: a. Dr. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . $ 550 Cr. Service Revenue . . . . . . . . . . . . . . . . . . . . . . $ 550 b. Dr. Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 360 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 c. Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . 30 Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . 30 d. Dr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 e. Dr. Wages Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600 Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600 f. Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 Cr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . . 600 g. Dr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . . 1,500

34. Accounting What the Numbers Mean 9e You should now have a better understandingof recording transactions and adjustments. Remember that there is a demonstration problem for each chapter that is here for your learning benefit. David H. Marshall Wayne W. McManus Daniel F. Viele