Concept explainers
Analyzing the Effects of Transactions in T-Accounts and Computing Cash Basis versus Accrual Basis Net Income
Stacey’s Piano Rebuilding Company has been operating for one year. At the start of the second year, its income statement accounts had zero balances and its balance sheet account balances were as follows:
Cash | $6,400 |
32,000 | |
Supplies | 1,500 |
Equipment | 9,500 |
Land | 7,400 |
Building | 25,300 |
Accounts payable | $9,600 |
Unearned revenue | 3,840 |
Long-term note payable | 48,500 |
Common stock | 1,600 |
Additional paid-in capital | 7,000 |
11,560 |
Required:
- 1. Create T-accounts for the balance sheet accounts and for these additional accounts: Rebuilding Fees Revenue, Rent Revenue. Wages Expense, and Utilities Expense. Enter the beginning balances.
- 2. Enter the following transactions for January of the second year into the T-accounts, using the letter of each transaction as the reference:
- a. Rebuilt and delivered file pianos in January to customers who paid $19,000 in cash.
- b. Received a $600 deposit from a customer who wanted her piano rebuilt.
- c. Rented a part of the building to a bicycle repair shop: received $850 for rent in January.
- d. Received $7,200 from customers as payment on their accounts.
- e. Received an electric and gas utility bill for $400 to be paid in February.
- f. f Ordered $960 in supplies.
- g. Paid $2,300 on account in January.
- h. Received from the home of Stacey Eddy, the major shareholder, a $920 tool (equipment) to use in the business in exchange for 100 shares of $1 par value stock.
- i. Paid $16,500 in wages to employees who worked in January.
- j. Declared and paid a $2,200 dividend (reduce Retained Earnings and Cash).
- k. Received and paid cash for the supplies in (f).
- 3. Using the data from the T-accounts, amounts for the following at the end of January of the second year were
Revenues $ _________ −Expenses $ ________ = Net Income $
Assets $ _________ = Liabilities $ _________ + Stockholders’ Equity $ ________
- 4. What is net income if Stacey’s used the cash basis of accounting? Why does this differ from accrual basis net income (in requirement 3)?
1 and 2
Prepare the T- account and enter the transaction into their respective accounts for calculating the ending balance.
Explanation of Solution
T-account:
T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
The components of the T-account are as follows:
a) The title of the account
b) The left or debit side
c) The right or credit side
Prepare the T-accounts:
Cash account:
Cash account | |||
Beginning balance | $6,400 | (g) | $2,300 |
(a) | $19,000 | (i) | $16,500 |
(b) | $600 | (j) | $2,200 |
(c) | $850 | (k) | $960 |
(d) | $7,200 | ||
Ending balance | $12,090 |
Accounts receivable account:
Accounts receivable account | |||
Beginning balance | $32,000 | (d) | $7,200 |
Ending balance | $24,800 |
Supplies account:
Supplies account | |||
Beginning balance | $1,500 | ||
(k) | $960 | ||
Ending balance | $2,460 |
Equipment account:
Equipment account | |||
Beginning balance | $9,500 | ||
(h) | $920 | ||
Ending balance | $10,420 |
Land account:
Land account | |||
Beginning balance | $7,400 | ||
Ending balance | $7,400 |
Building account:
Building account | |||
Beginning balance | $25,300 | ||
Ending balance | $25,300 |
Accounts payable account:
Accounts payable account | |||
Beginning balance | $9,600 | ||
(g) | $2,300 | (e) | $400 |
Ending balance | $7,700 |
Unearned revenue account:
Unearned revenue account | |||
Beginning balance | $3,840 | ||
(b) | $600 | ||
Ending balance | $4,440 |
Long-term note payable account:
Long-term note payable account | |||
Beginning balance | $48,500 | ||
Ending balance | $48,500 |
Common stock account:
Common stock account | |||
Beginning balance | $1,600 | ||
(h) | $100 | ||
Ending balance | $1,700 |
Additional paid-in capital account:
Additional paid-in capital account | |||
Beginning balance | $7,000 | ||
(h) | $820 | ||
Ending balance | $7,820 |
Retained earnings account:
Retained earnings account | |||
Beginning balance | $11,560 | ||
(j) | $2,200 | ||
Ending balance | $9,360 |
Rebuilding fees revenue account:
Rebuilding fees revenue account | |||
Beginning balance | 0 | ||
(a) | $19,000 | ||
Ending balance | $19,00 |
Rent revenue account:
Rent revenue account | |||
Beginning balance | 0 | ||
(c) | $850 | ||
Ending balance | $850 |
Wages expense account:
Wages expense account | |||
Beginning balance | 0 | ||
(i) | $16,500 | ||
Ending balance | $16,500 |
Utilities expense account:
Utilities expense account | |||
Beginning balance | 0 | ||
(e) | $400 | ||
Ending balance | $400 |
Thus, the t-accounts are prepared and the ending balances are calculated.
3.
Determine the amount for the given equations at the end of the January.
Answer to Problem 3.10E
For the equation
For the equation
Explanation of Solution
Accrual basis of accounting:
Accrual basis of accounting refers to recognizing the financial transactions during the period in which the event occurs, even if the cash is not exchanged.
Working note:
Calculate the revenues:
Calculate the expenses:
Calculate the net income:
Particulars | Amount($) | Amount ($) |
Revenues | (1)19,850 | |
Less: Expenses | (2)16,900 | |
Net income | $2,950 |
Table (1)
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Calculate the amount for the accounting equation:
Assets | = | Liabilities | + | Stockholders’ Equity |
$12,090 | $7,700 | $1,700 | ||
$24,800 | $4,440 | $7,820 | ||
$2,460 | $48,500 | $9,360 | ||
$10,420 | $2,950 | |||
$7,400 | ||||
$25,300 | ||||
$82,470 | = | $60,640 | + | $21,830 |
Table (2)
4.
Calculate the net income under cash basis of accounting and explain the reason in which manner the net income differ from accrual basis of accounting.
Answer to Problem 3.10E
Net income of Company SPR under cash basis of accounting is $7,890.
Explanation of Solution
Cash basis of accounting:
Cash basis of accounting refers to the recognition of financial transactions only when the cash is received or paid.
Calculate the net income under cash basis accounting:
Particulars | Amount($) | Amount ($) |
Cash receipts | (3) 27,650 | |
Less: Cash payments | (4) 19,760 | |
Net income | $7,890 |
Table (3)
Calculate the cash receipts:
Calculate the cash payments:
- According to the cash basis of accounting, the net income is higher than the accrual basis of accounting.
- The recording of the expenses and revenues differ from the accrual basis of accounting.
- Hence, the net income is different for the accrual basis of accounting and cash basis of accounting.
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Chapter 3 Solutions
FINANCIAL ACCOUNTING 9TH
- Analyzing the Accounts The controller for Summit Sales Inc. provides the following information on transactions that occurred during the year: a. Purchased supplies on credit, $18,600 b. Paid $14,800 cash toward the purchase in Transaction a c. Provided services to customers on credit1 $46,925 d. Collected $39,650 cash from accounts receivable e. Recorded depreciation expense, $8,175 f. Employee salaries accrued, $15,650 g. Paid $15,650 cash to employees for salaries earned h. Accrued interest expense on long-term debt, $1,950 i. Paid a total of $25,000 on long-term debt, which includes $1.950 interest from Transaction h j. Paid $2,220 cash for l years insurance coverage in advance k. Recognized insurance expense, $1,340, that was paid in a previous period l. Sold equipment with a book value of $7,500 for $7,500 cash m. Declared cash dividend, $12,000 n. Paid cash dividend declared in Transaction m o. Purchased new equipment for $28,300 cash. p. Issued common stock for $60,000 cash q. Used $10,700 of supplies to produce revenues Summit Sales uses the indirect method to prepare its statement of cash flows. Required: 1. Construct a table similar to the one shown at the top of the next page. Analyze each transaction and indicate its effect on the fundamental accounting equation. If the transaction increases a financial statement element, write the amount of the increase preceded by a plus sign (+) in the appropriate column. If the transaction decreases a financial statement element, write the amount of the decrease preceded by a minus sign (-) in the appropriate column. 2. Indicate whether each transaction results in a cash inflow or a cash outflow in the Effect on Cash Flows column. If the transaction has no effect on cash flow, then indicate this by placing none in the Effect on Cash Flows column. 3. For each transaction that affected cash flows, indicate whether the cash flow would be classified as a cash flow from operating activities, cash flow from investing activities, or cash flow from financing activities. If there is no effect on cash flows, indicate this as a non-cash activity.arrow_forwardTo demonstrate the difference between cash account activity and accrual basis profits (net income), note the amount each transaction affects cash and the amount each transaction affects net income. A. issued stock for cash $20,000 B. purchased supplies inventory on account $1,800 C. paid employee salaries; assume it was current days expenses $950 D. paid note payment to bank (principal only) $1,200 E. collected balance on accounts receivable $4,750arrow_forwardLast year, Nikkola Company had net sales of 2.299.500,000 and cost of goods sold of 1,755,000,000. Nikkola had the following balances: Refer to the information for Nikkola Company above. Required: Note: Round answers to one decimal place. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the accounts receivable turnover in days.arrow_forward
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