EXERCISES FOR CHAPTER 2&3

3.1.1. Self-tests
1. If assets = liabilities + owner’s equity, then how can liabilities be expressed?
 Liabilities = assets – OE
2. Explain the different between an account receivable and an account payable?
  Account payable Account receivable

Definition Money expected to be by the Money expected to be

company in the future for the received by the company
goods bought and services in the future for the goods
received from the suppliers on sold and services rendered
credit. to the customers on credit.

Status Liabilities Assets

Example Company A sells merchandise to When the amount of the

Company B on credit (with credit sale is remitted,
payment due 30 days later). Company B will debit its
Company A will record the liability Accounts Payable
amount of the sale with a credit to and will credit Cash.
Sales and a debit to Accounts Company A will debit
Receivable. Company B will Cash and will credit its
record the purchase (perhaps as current asset Accounts
inventory) with a credit to Receivable.
Accounts Payable.

Components Bills Payable and Creditors. Bills Receivable and

Debtors.

3. What role do transactions play in accounting?

4. Give a more descriptive title for the balance sheet?
5. What feature of the balance sheet gives this financial statement its names?
6. What are some other names sometimes given to the profit and loss statement?
7. Which financial statement is like a snapshot of the entity at a specific time? Which
financial statement is like a video of the entity’s operations during a period of time?
 8. What information does the statement of owner’s equity report?
9. What piece of information flows from the profit and loss statement to the statement of
owner’s equity?
10. What information flows from the statement of owner’s equity to the balance sheet?
11. What balance sheet item is explained by the statement of cash flows?

3.1.2. Problems
Exercise 1: Recording transactions. Monica Peters opened a medical practice in Perth, Western
Australia. Record the following transactions in the journal of Monica Peters, GP. Include an
explanation with each journal entry.
June 1 Peters invested $64,000 cash in a business bank account to start her medical
practice. The business received the cash and gave Peter owner’s equity in the business.
June 2 Purchased medical supplies on credit, $9,000.
June 3 Paid monthly office rent of $4,000.
June 4 Recorded $5,000 revenue for service rendered to patients. Received cash of $2,000
and sent bills to patients for the remainder.
TRANSACTION ANALYSIS, JOURNALIZING AND POSTING TO THE ACCOUNTS

June 1 Peters invested $64,000 cash in a business bank account to start her medical
practice. The business received the cash and gave Peter owner’s equity in the
business.
Analysis The business increased its assets (Cash), debit Cash at Bank. The business also
increased its owner’s equity; so credit Peters, Capital.
Journal Cash at Bank 64,000
Peters, Capital 64,000
Received initial investment from owner.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash at Bank = Peters, Capital
+64,000 = 0 + 64,000

Ledger Cash at Bank Peters, Capital

account (1) 64,000 (1) 64,000
June 2 Purchased medical supplies on credit, $9,000.
Analysis This event increased Assets (medical supplies), debit Medical supplies. This also
increased Liabilities (A.P), credit Payables a.c.
Journal entry Medical supplies 9,000
 Payables 9,000
Purchased on credit.
Accounting Assets = Liabilities + Owner’s Equity
equation Medical supplies = Payables
+9,000 = 0 + 9,000
Ledger Medical supplies Payables
account (2) 9,000 (2) 9,000
June 3 Paid monthly office rent of $4,000.
Analysis This event declined the Owner’s equity by increasing expenses, debit Office
Expense a/c. This also decreased Assets (Cash), credit Cash a.c.
Journal entry Office Expense 4,000
Cash 4,000
Purchased on credit.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash = Office Expense
- 4,000 = 0 + 4,000
Ledger Cash Office Expense
account (3) 4,000 (3) 4,000
June 4 Recorded $5,000 revenue for service rendered to patients. Received cash of
$2,000 and sent bills to patients for the remainder.
Analysis This event increased the Assets (Cash and Receivables), credit Cash and Receivables
a/c. This also increased the Owner’s equity by increasing Revenue, credit Revenue
a/c.
Journal entry Cash 2,000
Receivables 3,000
Revenue 5,000
Recorded revenue both in cash and on credit.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash + Receivables = Revenue
+2,000 + 3,000 = 0 + 5,000
Ledger Cash Revenue
account (4) 2,000 (4) 5,000
Receivables
(4) 5,000

Exercise 2: Recording transactions. After operating for several months, Monica Peters, GP,
completed the following transactions during the latter part of October:
 October 12 Borrowed $50,000 from the bank, signing a bill payable.
October 15 Performed service for patients on credit, $4,000.
October 17 Received cash on account from patients, $1,000
October 28 Received an electricity and gas bill, $200, which will be paid during
November.
October 30 Paid monthly salary to nurse, $3,000
October 31 Paid interest expense of $2,500 on the bank loan.
October 12 Borrowed $50,000 from the bank, signing a bill payable.
Analysis This event made the Assets (Cash) increase, debit Cash a/c. This also made the
Liabilities (Bill Payable ) increase, credit Bill Payable a/c
Journal entry Cash 50,000
Bill Payable 50,000
Borrowed money from bank.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash at Bank = Bill Payable
+50,000 = 50,000 + 0
Ledger Cash at bank Bill Payable
account (1)50,000 (1) 50,000
October 15 Performed service for patients on credit, $4,000.
Analysis This event increased Assets (Accounts receivable), debit A.R a/c. This also
increased O.E (revenue), credit revenue account
Journal entry Receivables 4,000
Revenue 4,000
Recorded revenue on credit
Accounting Assets = Liabilities + Owner’s Equity
equation Receivables = Revenue
+ 4,000 = 0 + 4,000
Ledger Receivables Revenue
account (2) 4,000 (2) 4,000
October 17 Received cash on account from patients, $1,000
Analysis This event increased Assets (cash), debit Cash a/c.
This also decreased Assets (Accounts receivable), credit A.R a/c
Journal entry Cash at bank 1,000
Receivables 1,000
Recorded receivables in cash at bank.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash at bank = Receivables
 1,000 = 0 + 1,000
Ledger Cash at Bank Receivables
account (3) 1,000 (3) 1,000
October 28 Received an electricity and gas bill, $200, which will be paid during November.
Analysis This decreased Owner’s Equity (increasing Expenses), debit Expense a/c.
This also increased Liabilities (Account payable), credit A.P a/c.
Journal entry Office Expense 200
Payable 200
Purchased on credit.
Accounting Assets = Liabilities + Owner’s Equity
equation Payable = Office Expense
- 200 = 0 + 200
Ledger Payable Office Expense
account (4) 200 (4) 200
October 30 Paid monthly salary to nurse, $3,000
Analysis This decreased Owner’s Equity (by increasing Expenses), debit Expense a/c.
This also decreased Assets (Cash), credit Cash a/c.
Journal entry Expense 3,000
Cash 3,000
Purchased on credit.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash = Expense
- 3,000 = 0 + 3,000
Ledger Cash Expense
account (5) 3,000 (5) 3,000
October 31 Paid interest expense of $2,500 on the bank loan.
Analysis This decreased Owner’s Equity (by increasing Expenses), debit Expense a/c. This
also decreased Assets (Cash), credit Cash a/c.
Journal entry Expense 2,500
Cash 2,500
Purchased on credit.
Accounting Assets = Liabilities + Owner’s Equity
equation Cash = Expense
- 2,500 = 0 + 2,500
Ledger Cash Expense
account (6) 2,500 (6) 2,500
Exercise 3: Journalizing transactions; posting. Grant Tobias performed legal services for a
client who could not pay immediately. Tobias expected to collect the $3,000 the following month.
A month later, Tobias received $2,000 cash from the client.
1. Record the two transactions on the books of Grant Tobias, Solicitor. Include an explanation
for each transaction.
2. Open these accounts: Cash at Bank; Accounts Receivable; Service Revenue. Post to all three
accounts. Calculate each account’s balance, and denote as Bal.
3. Answer these questions based on your analysis:
a. How much did Tobias earn? Which account shows this amount?
b. How much in total assets did Tobias acquire as a result of the two transactions? Show the
amount of each asset.
Exercise 4: Posting; Preparing a trial balance. Use the June transaction data for Monica Peters,
GP, given in Exercise 1.
4. Open the following T–accounts of Monica Peters, GP: Cash at Bank; Accounts Receivable;
Medical Supplies; Accounts Payable; Monica Peters; Capital; Service Revenue; Rent
Expense.
OB - 64.000
6. 2.000

CB (62000)

Trial Balance
June, 4, 20X8
Account Dr Cr
Cash on hand 66000
Cash at bank 4000
Account Receivable 3000
Medical Supplies 9000
Accounts Payable 9000
Monica Peters’ capital 64000
Service Revenue 5000
Rent Expense 4000
Total 82000 82000
 7. After making the journal entries in Exercise 1, post from the journal to the ledger. No dates or
posting references are required. Take the balance of each account, and denote it as Bal.
8. Prepare the trial balance, complete with a proper heading, at 4 June 20x8.
Exercise 5: Analyzing and journalizing transactions. Analyze the following transactions in the
manner shown for the December 1st transaction of Telemark Cellular. Also record each transaction in
the journal. Explanations are not required.
December 1 Paid electricity and gas expense of $700. (Analysis: The expense electricity and gas
expense is increased; therefore, debit Electricity and Gas Expense. The asset Cash at Bank is
decreased; therefore, credit Cash at Bank)
1 Electricity and Gas Expense 700
Cash at Bank 700
Dec. 5 Borrowed $7,000 cash, signing a bill payable.
This event made the Assets (Cash) increase, debit Cash a/c. This also made the Liabilities
(Bill Payable ) increase, credit Bill Payable a/c
Cash 7,000
Bill Payables 7,000
Dec. 10 Performed service on credit for a customer, $1,600.
This event increased the Assets (Receivables), credit Receivables a/c. This also increased the
Owner’s equity by increasing Revenue, credit Revenue a/c.
Receivables 1,600
service revenue 1,600
Dec. 12 Purchased office furniture on credit, $800.
This event increased Assets (furniture supplies), debit furniture supplies. This also increased
Liabilities (A.P), credit Payables a.c.
Office furniture 800

Payables 800

Dec. 19 Sold for $74,000 land that had cost this same amount.
Cash, Cash at bank 74,000

Lands 74000

Dec. 24 Purchased building for $140,000; signed a bill payable.

This event increased Assets (building), debit building. This also increased Liabilities (A.P), credit
Payables a.c.
Building 140,000
Payables 140,000
Dec. 27 Paid the liability created on December 12th.
This event decreased Liabilities (A.P), debit A.P. This also Assets (Cash), credit Cash

A.P 800
Cash 800

Exercise 6: Applying the rules of debit and credit. Refer to Exercise 5 for the transactions of
Telemark Cellular.
1. Open the following T-accounts with their December 1st balances: Cash at Bank, debit balance
$6,000; Land, debit balance $74,000; Toni Steere, Capital, credit balance $80,000.
2. Record the transactions of Exercise 5 directly in the T-accounts affected. Use the dates as
posting references. Journal entries are not required.
3. Calculate the December 31st balance for each account, and prove that total debits equal total
credits.
Exercise 7: Journalizing transactions. Wellness Health Club engaged in the following
transactions during March 20x7, its first month of operations:
Mar. 1 Lou Stryker invested $45,000 of cash to start the business.
Mar. 2 Purchased office supplies of $200 on credit.
Mar. 4 Paid $400,000 cash for a building to use as a future office.
Mar. 6 Performed service for customers and received cash, $2,000.
Mar. 9 Paid $100 on accounts payable.
Mar. 17 Performed service for customers on credit, $1,600.
Mar. 23 Received $1,200 cash from a customer on account.
Mar. 31 Paid the following expenses: salary, $1,200; rent, $500.
Required:
1. Record the preceding transactions in the journal of Wellness Health Club. Key transactions by
date and include an explanation for each entry, as illustrated in the chapter. Use the following
accounts: Cash at Bank; Accounts Receivable; Office Supplies; Building; Accounts Payable;
Lou Stryker, Capital; Service Revenue; Salary Expense; Rent Expense.
2. After journalizing the transactions, post the entries to the ledger, using the T-account format.
Key transactions by date. Date the ending balance of each account Mar. 31st.
3. Prepare the trial balance of Wellness Health Club at 31st March 20x7.
Exercise 8: Describing transactions and posting. The journal of Rosenberg & Associates
includes the following transaction entries for August 20x6.
Journal Page 5
Date Accounts and Explanation Post. Ref. Debit Credit
Aug. 2 Cash at Bank 18,000
Mathew Rosenberg, Capital 18,000
 5 Cash at Bank 15,000
Bill Payable 15,000
9 Supplies 270
Accounts Payable 270
11 Accounts Receivable 2,630
Sales Revenue 2,630
14 Rent Expense 4,200
Cash at Bank 4,200
22 Cash at Bank 1,400
Accounts Receivable 1,400
25 Advertising Expense 350
Cash at Bank 350
27 Accounts Payable 270
Cash at Bank 270
31 Electricity and Gas Expense 220
Accounts Payable 220
Required:
1. Describe each transaction.
2. Post the transactions to the ledger using the following account numbers: Cash at Bank, 110;
Accounts Receivable, 120; Supplies, 130; Accounts Payable, 210; Bill Payable, 230; Mathew
Rosenberg, Capital, 310; Sales Revenue, 410; Rent Expense, 510; Advertising Expense, 520;
Electricity and Gas Expense, 530. Use dates, journal references and posting references. You
may write the account numbers as posting references directly in your book.
3. Calculate the balance in each account after posting. Prepare Rosenberg & Associates’ trial
balance at 31st August 20x6.
Exercise 9: Preparing a trial balance. The accounts of Allergan follow with their normal
balances at 31st December 20x7. The accounts are listed in no particular order.
Account Balance ($)
Martin Allergan, capital 48,800
Advertising expense 650
Accounts payable 4,300
Sales commission revenue 22,000
Land 29,000
Bill payable 45,000
Cash at Bank 5,000
Salary expense 6,000
Building 65,000
 Rent expense 2,000
Martin Allergan, drawings 6,000
Electricity and gas expense 400
Accounts receivable 5,500
Supplies expense 300
Supplies 250
Required: Prepare the business’s trial balance at 31 December 20x7, listing accounts in proper
st

sequence, as illustrated in the chapter. For example, Supplies comes before Building and Land.
List the expense with the largest balance first, the expense with the next largest balance second,
and so on.
Exercise 10: Recording transactions without a journal.
Open the following T-accounts: Cash at Bank; Accounts Receivable; Office Supplies; Office
Furniture; Accounts Payable; Nick Loren, Capital; Nick Loren, Drawings; Service Revenue;
Salary Expense; Rent Expense. After recording the transactions, prepare the trial balance of Nick
Loren, CPA, at 31st May 20x7.
Required:
1. Loren opened an accounting firm by investing $12,400 cash and office furniture valued at
$5,400.
2. Paid monthly rent of $1,500.
3. Purchased office supplies on credit, $800.
4. Paid employee’s salary, $1,800.
5. Paid $400 of the account payable created in transaction (3).
6. Performed accounting service on credit, $1,700.
7. Withdrew $2,000 for personal use.
Exercise 11: Recording transactions and preparing a trial balance.
Allan Derringer completed these transactions during the first half of December.
Dec. 1st Invested $12,000 to start a consulting practice, Allan Derringer, Consultant.
Dec. 2nd Paid monthly office rent, $500.
Dec. 3rd Paid cash for a Dell computer, $3,000. The computer is expected to remain in service for
five years.
Dec. 4th Purchased office furniture on credit, $3,600. The furniture should last for five years.
Dec. 5th Purchase supplies on credit, $300.
Dec. 9th performed service for a client and received cash for the full amount of $800.
Dec 12th Paid electricity and gas expenses, $200.
Dec. 18th Performed consulting service for a client on credit, $1,700.
Required:
1. Open T-accounts in the ledger: Cash at Bank; Accounts Receivable; Supplies; Equipment;
Furniture; Accounts Payable; Allan Derringer, Capital; Allan Derringer, Drawings; Service
Revenue; Rent Expense; Electricity&Gas Expense; and Salary Expense.
2. Journalize the transactions. Explanations are not required.
3. Post to the T-accounts. Key all items by date, and denote an account balance as Bal. formal
posting references are not required.
4. Prepare a trial balance at 18th December, add transactions for the remainder of December and
prepare a trial balance at 31st December.

EXERCISE 11: Analysis of business transactions

Lleyton Cash has recently retired from playing professional tennis, so he decides to set up his own
tennis coaching academy.
1. He contributes $100,000 of his personal savings into a business bank account under the
name of Cash Coaching Services (CCS).
2. CCS purchases a new laptop computer for $2,000 from JB Technologies for cash. The
laptop will be classified as an item of office equipment for the business.
3. CCS sends an invoice to Aussie Wallabies for providing tennis coaching services totaling
$3,000. Aussies Wallabies will have 30 days’ credit.

EXERCISE 12: Analysis of business transactions

Jill Smith opens an apartment-location business near a university campus. She is the sole owner of
the proprietorship which she names Campus Apartment Locators. During the first month of
operations, July 20XX, Smith engages in the following transactions:
a. She invests $35,000 of personal funds to start the business.
b. She purchases on credit office supplies costing $350.
c. She pays cash of $30,000 to acquire a block of land next to the campus. She intends to use
the land as a future building site for her business.
d. She locates apartments for clients and receives cash of $1,900.
e. She pays $100 on the account payable she created in transaction (b).
f. She pays $2,000 of personal funds for a vacation.
g. She pays cash expenses for office rent, $400, and electricity and gas, $100.
h. The business sells office supplies to another business for its cost of $150.
i. Smith withdraws cash of $1,200 for personal use.

EXERCISE 13: Analysis of business transactions

On 1 August 20X5, Liz Shea opens Shea’s Research Service. She will be the owner of the
proprietorship. During the entity’s first 10 days of operations, the business completes these
transactions:
a. To begin operations, Shea deposits $40,000 of personal funds in a bank account entitled “Shea’s
Research Service”. The business receives the cash and gives Shea capital (owner’s equity)
b. Shea pays $30,000 cash for a small building to be used as an office for the business.
c. Shea purchases office supplies for $500 on credit.
d. Shea pays cash of $6,000 for office furniture.
e. Shea pays $150 on the accounts payable she created in transaction (c)
f. Shea withdraws $1,000 cash for personal use.