146 CHAPTER 3 the follov nal entries for each transaction. Be sure to categorize

Question

146 CHAPTER 3 the follov nal entries for each transaction. Be sure to categorize each account as an asset (A), liability (L), stockholders' equity (SE), revenue (R), or expense (E). Sho E3-10 LO3-3, 3-4 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 Su Pr of $ 9,600 3,840 Accounts payable Unearned revenue Long-term note payable Common stock Additional paid-in capital Retained earnings $ 6,400 Cash Accounts receivable 1,500 9,500 7.400 1,600 7,000 11,560 Require Re 2, E Land 1. Create T-accounts for the balance sheet accounts and for these additional accounts: Rebuild- tI ing 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 five 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 Ordered S960 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 (). 3. Using the data from the T-accounts, amounts for the following at the end of January of the second year were

Explanation / Answer

Solution of the question as

Cash:

Accounts Receivable:

Supplies:

Equipment:

Land:

Building:

Accounts Payable:

Unearned Revenue:

Common Stock:

Additional Paid-in Capital:

Retained Earnings:

Rebuilding Fees:

Rent Revenue:

Wages Expense:

Utilities Expense:

3. Revenues - Expenses = Net Income

Assets = Liabilities + Stockholders Equity = (Accounts Payable + Unearned Revenue+ Long Term Note Payable ) + ( Common Stock + Additional Paid-in Capital + Retained Earnings) = $ ( 7,700 + 4,440 + 48,500) + $ ( 1,700 + 7,820 + 12,310) = $ 82,470

4. If the cash basis of accounting was used, net income = $ ( 19,000 + 600 + 850 + 7,200) - $ ( 2,300 - 16,500 - 960) = $ 7,890.

Under the cash basis, there would be no accounts receivable or accounts payable. Receipts would be recognized as revenue when received, irrespective of whether services have been rendered or not. The time period or the matching principles are not relevant.

Similarly accrued expenses are not also not recognized, as the accrual principle is also not followed.

Balance 6,400 g. 2,300 a. 19,000 i. 16,500 b. 600 j. 2,200 c. 850 k. 960 d. 7,200 Balance 12,090

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