BY

Cc/ A'ASHA MATHEW & A.SHANU AJOY

MARTIN DE TOURS SCHOOL OF MANAGEMENT AND ECONOMICS
 Teaching Materials

ACT 1600
Fundamentals of Financial Accounting

Martin de Tours School of Management and Economics

Assumption University

Compiled by

A.Asha Mathew & A.Shanu Ajoy

The materials in this book are intended only for teaching and learning
purposes within the universitiand not for commercial purposes
 TABLE OF CONTENTS

Chapter 1: Accounting in Action

Chapter 2: The Recording Process 14

Chapter 3: Adjusting the Accounts 40

Chapter 4: Completing the Accounting Cycle 58

Chapter 5: Accounting for Merchandising Operations 70

Chapter 6: Inventories 96
Chapter 7: Bank Reconciliation 110

Chapter 8: Accounting for Receivables 122

Chapter 9: Plant Assets, Natural Resources, and Intangible Assets 140

Chapter 10: Special Journals 156

Chapter 11: Liabilities 165

Chapter 12: Corporations: Organisation, Share Transactions,

Dividends, and Retained Earnings 181

Chapter 13: Investments 201

ACT1600 Fundamentals of Financial Accounting

CHAPTER!
ACCOUNTING IN ACTION
Objectives: After studying this chapter, you should be able to:
. Explain what accounting is
. Identify the users and uses of accounting
. Explain accounting standards and measurement principles
. Explain the monetary unit assumption and economic unit assumption
. State the accounting equation and define its coll),ponents
. Analyze the effects of business transactions on the accounting equation
. Understand the four financial statements and how they are prepared

To acquire the skills needed to understand what is happening financially inside a company we
choose accounting. In order to understand an organization of any type, you need to know
numbers.

What is Accounting?
The purpose of accounting is to:
• Identify,
• Record, and
• Communicate the economic *events of an organization to interested users.

*Examples of events: Sale of food and beverage, Manufacture of motor vehicles, service
provided by insurance companies.

Who Uses Accounting Data?

Internal Users: The managers within the organization who plan, organize and run the business
are the internal users of accounting information. These include marketing managers, production
supervisors, finance directors, and company officers.
External Users: Individuals and organizations outside a company who want financial
information about the company. The two most common types of external users are investors and
creditors.
• Investors use accounting information to make decisions to buy, hold or sell ownership
shares of a company.
• Creditors such as suppliers and bankers use accounting information to evaluate the risks
of granting credit or lending money.
Accounting Standards
To make sure that financial reporting is of high quality, accountants present financial statements
in conformity with accounting standards that are issued by standard setting bodies. Currently,
there are two primary accounting standard setting bodies-
• The International Accounting Standards Board (IASB) http://www.iasb.org/
• The Financial Accounting Standards Board (FASB) http://www.thsb.org/.

More than 130 countries follow standards referred to as International Financial

Reporting Standards (IFRS). IFRSs are determined by the IASB.
Most companies in the United States follow standards issued by the FASB, referred to as
Generally Accepted Accounting Principles (GAAP).

Measurement Principles
Cost Principle (Historical) - The historical cost principle dictates that companies record assets
at their cost. This is true not only at the time the asset is purchased, but also over the time the
asset is held.

Fair Value Principle - The fair value principle states that assets and liabilities should be
reported at fair value. Fair value information may be more useful than historical cost for certain
type of assets and liabilities. For example, certain investment securities are reported at fair value
because market value information is usually readily available for these types of assets.

1
ACT1600 Fundamentals of Financial Accounting

Assumptions:
Assumptions give adequate foundation for the accounting process. Two main assumptions are
the monetary unit assumption and the economic entity assumption.
Monetary Unit Assumption- Only transaction data's that can be expressed in terms of money
should be included in the accounting records.
Economic Entity Assumption -holds that the entities activities needs to be kept separate and
distinct from the activities of its owner and other economic entities.

Forms of Business Ownership:

Proprietorship
• Generally owned by one person.
• Often small service-type businesses
• Owner receives any profits, suffers any losses, and is personally liable for all debts.
Partnership
• Owned by two or more persons.
• Often retail and service-type businesses
• Generally unlimited personal liability
• Partnership agreement
Cor·poration
• Ownership divided into shares
• Separate legal entity organized under state corporation law
• Limited liability

The Basic Accounting Equation

The two basic elements of a business are what it owns and what it owes.
Assets are the resources a business owns.
Liabilities and owner's equity are the rights or claims against these resources.
Claims of owners are called equity.

---=L=L::.:'A=B=JL=I=T=IE=S=--_+_....:E=-Q""'-=-U=-=IT::...:Y=-----.....l
This relationship is the basic accounting equation.
Assets
• Resources a business owns.
• Provide future services or benefits.
• Cash, Inventory, Equipment, etc.
Assets are classified into Current Assets and Non-current Assets.
(1) Current Assets:
Current Assets are resources that are expected to be consumed in the business within one year.
They are:
Cash
Short-term investments or Marketable Securities
Accounts Receivable
Notes Receivable
Inventory
Supplies
Prepaid expenses

Cash- includes currency, and checks.

Short-term investments- are shares or bonds which can be easily bought or sold in the stock
exchange.

Accounts Receivable- arises from credit sales. The debtor or customer agrees (a verbal promise)
to make payment within a certain period of time but no interest is charged.

Notes Receivable -are written promissory notes (written promise) from the debtor or customer
whereby the customer promises to make payment after a certain period of time. An interest rate
is applied on these notes.

2
ACT1600 Fundamentals of Financial Accounting

Inventories- include merchandise and raw materials used in production

Supplies- These are materials acquired for use in the office such as paper and stationery.

Prepaid expense -These are expenses which are paid in advance and for which no service has
yet been performed to the business. Ex: Prepaid Rent, Prepaid insurance

(2) Non-Current assets:

Non-current assets are tangible resources that are used in the business for a long period and not
intended for sale. They are also called Plant Assets I Property, Plant and Equipment. They are:
Land
Building
Equipment

Liabilities are existing debts and obligations of the business.

Liabilities are classified into Current Liabilities and Non-current Liabilities.
1) Current Liabilities.
Current Liabilities are obligations that are expected to be paid within one year. They are:
Notes Payable •
Accounts Payable
Unearned Revenue
Salaries and wages Payable
Other short-term payables.

Notes Payable is a promissory note made and signed bv the business, (written promise)
whereby the business promises to make payment after a certain period of time. Interest is payable
on the note.

Accounts Payable arises from credit purchases (oral promise). The business agrees to make the
payment after a certain period of time. No interest is payable.

Unearned Revenue is an advance received by the business from the customer but services will
ingest
be rendered only in the future. ::! "ll 0"1 mess · '

Other Payables are expenses due but not yet paid and has to be paid in the future.

2) Non- Current Liabilities:

Non-current liabilities are obligations expected to be paid after one year.

Examples:
Mortgage Payable- Pay a loan that is secured by a property.
Bank loan - an amount of money loaned at interest by a bank to a borrower.
Bonds Payable- is a form oflong-term debt issued by corporations, government etc. Bond
carries interest.

Shareholders' Equity (Residual equity)

The ownership claim on total assets is equity. It is equal to total assets minus total liabilities.
Equity generally consists of (1). share capital- ordinary and (2) retained earnings.

Share Capital-Ordinary: smorgasbord

iJYc\,nn•y Shave (
Share Capital-Ordinary is the term used to describe the amounts paid in by shareholders for the
ordinary shares they purchase. (investment made by shareholders).

Retained Earnings:
Retained earnings are determined by three items: revenues, expenses and dividends.

3
 ACT1600 Fundamentals of Financial Accounting

name
INCREASES DECREASES

Investments by Dividends -co

Eq«ity

Revenues Expenses

Revenues result from business activities entered into for the purpose of earning income.
Generally results from selling merchandise, performing services, renting property, and lending
money.
Expenses are the cost of assets consumed or services used in the process of earning revenue.
Common expenses are salaries expense, rent expense, utilities expense, tax expense, etc.
Dividends are the distribution of cash or other assets to shareholders. It reduces retained
earnings but it is not an 01
)

USING THE ACCOUNTING EQUATION:

Transactions are a business's economic events recorded by accountants.
• May be external or internal.
• Not all activities represent transactions.
• Each transaction has a dual effect on the accounting equation.
TRANSACTION ANALYSIS
Exp.,:md""d <1C('OW1tmg

Equity

Share CopiGti-Ordlnnry +

Revenues Dividends

Transaction (1). Investment by Shareholders. Alex and Amy decide to open a computer
programming service which they name Betagun. On September 1, they invest $15,000 cash in
exchange for capital shares. The effect ofthis transaction on the basic equation is:

Assets Liabilities + E<JUity

Share
Cash
(I )

Transaction (2). Purchase of equipment for cash $7,000.

Lial>ili1 + E<Jtti1y
Share-
13.-<..tuiprncnt
C>Id Bal. $15,0<Xl $1 5,000
(2)
New Bnl. $15.0(Xl

Transaction (3). Purchase of Supplies on Credit. Betagun purchased computer paper and
other supplies on account for $1,600 from Elon Supply Company. The supplies are expected to
last several months.
Asset;; Liabilities + E<111itv
Accounts Share
Cash + Supplies + Equipment Payable + Capiud
Old Bal. $8.000 $7.000 $15,000
(3)
New Bal. $8.000 + + $7.000 $1.60() + $15.000
$16.600 $16.600

4
ACT1600 Fundamentals of Financial Accounting

Transaction (4). Services Provided for Cash. Betagun receives $1,200 cash from customers
for programming services it has provided.
Assets = Unbilitics + E![Uity
Accounts Share Retained Earnings
Cash + Supplies + Equipment
Payable
+
Capital
+ Rev. Exp. Div.
Old Bal. $8,000 $1.600 $7,000 $!.600 $l5.0W
(4) +1.20!} +$l.2!Hl
New Bal. $9,200 + $1.600 + $7.000 Sl,600 + $15,000 + $1.200
$l7.8lKJ $l7,8(X)

Transaction (5). Purchase of Advertising on Credit. Betagun receives a bill for $250 from
the Sundry News for advertising but postpones payment until a later date.
Assets = Liabilities + E!JUity
Accounts Share Retained Earnings
Cash + Supplies + Equipment + +
Payable Capital Rev. Exp. Div.
Old Bal. $9.200 $1,600 $7,000 $1.600 $15.000 $1.200
(5) +250
New Bal. $9,200 + $1,6(XJ + 57.000 Sl,850 + $15.0lXJ + SL200 $250
$17,800 $17.800

Transaction (6). Services Provided for Cash and Credit. Betagun provides $3,500 of
programming services for customers. The company receives cash of $1,500 from customers, and
it bills the balance of$2,000 on account
Assets Liabilities + Equity
Accounts Accounts Shure Retained Earnings
Cash + Recei;-ablc + Supplies + Equipment Payable
+ Capital + Rev. Exp. -
Div.
,1'
Old Bal. $ 9,200 $1.600 $7,000 $1,850 $15,000 $1.200 $250
(6) +l.Sflll +Sl.IHHl +J.SHO
New Bal. $!0,71)0 + $2,000 + SL600 + $7,rKIO $1.850 + $15,000 + $4,700 $250
$21.300 $21,300

Transaction (7). Payment of Expenses. Betagun pays the following Expenses in cash for
September: store rent $600, salaries of employees $900, and utilities $200.
Liubilitics +
Accounts Shan: Retained E·:arnings
+ Rcl:civablc + Supplies + Equipment Payable + CapilnJ + Rev. E:.:p. Div.
OldBaL $10,700 $2,000 $1.600 $7,001) $1,850 SI5.0CXl $4.700 :;; 250
(7) -1.7Jl(l -(}f)H
-9HU
-2Hn
N'·wBal. $ 9,1!00 + $2,000 + $1,600 + $7.000 + $15,000 + $4,700 $1,950
$19.61)() $19,(100

Transaction (8). Payment of Accounts Payable. Betagun pays its $250 Sundry News bill in
cash.
Assets = Liabilities + E<1nity
Accounts Accounts Share Retained Earnings
Cash + Rcxivablc + Supplies + Equipment Payable + Capital + Rev. Exp. Div.
Oidllal. $9JJIXJ $2JXill sl,6ll0 $7.000 $1,850 $15.0o:J S4,7tXl $!.950
(S) -2SO -25!1
New Bal. $8,750 + $2.(XJIJ + $L6!XJ + S7,000 $LNXJ + $15JXXJ + $4.7!XJ - $1.950
Sl'J,350 $!9,350

5
ACT1600 Fundamentals of Financial Accounting

Transaction (9). Receipt of Cash on Account. Betagun receives $600 in cash from customers
who had been billed for services [in Transaction (6)].
A;sets l.iabilitie1 +
Accounts AcCt)Unts Share Retained
Cash + + Supplies + Equipment + +
Receivable Capital Rcr. Exp. Div.
Old Bal. SS.75fl $2JHIII $l.6(ill $7.0lHi $1,(;[1(1 $l5JHII $.J.7!Xl Sl.950
(9)
i\ew Bal. ,$9.350 + $1.400 + $1.t\W + S7.000 SJ,t;(Kl + 'HS.!KXl + $.!.7(11 - $1.950
$1').350 mJso

Transaction (10). Dividends. The corporation pays a dividend of$1,300 in cash.

Liabilities + EIJUity
Accounb Accounts Share Retained Earning'>
Receivable
+ Supplb + Equipment Payable + Capital + Rev. Exp. Div.
Old Bal. $').350 $1.4fKl SU>OO $7.01Hl $1.nUII $15JHXl $.).7()0 $1.')5()
(10)
New Bal. $K05tl + $1..\IHJ + $1.600 + $7.000 $1.6110 + $1S.OW + $<,700 $1.951) $UOO
$1K.05U

Summary of Transactions
Linhilitics + E<1uity
Accc)unts Aci.:ounts Retained Etlrnings
Cash + Supplks + Equipment + +
Transat::tion + R.:ccivahlc Payable {'apital RcY. Exp. - Div.
(I; +$15.000 + Sl5.000
(2) -7.000 +:!>7.1XJO
(3) +$1,600 +$1.(;[)0
( +1.200 +$1.200
(5) +250 -$250
(6) + 1,500 +$2.1100 +3.500
(7) -l,7t)() -600
-•JIKJ
-200
(I>) -250
(9) +(;()() -600
(!OJ -1-lOO -$[3011
$ 8.050 + $1,41)() + $1.1>00 + $7.000 $t,h00 + $15,0011 + $4,71!0 - $1.950 - Sl.3011

$!K.050 $1R.050

Companies prepare four financial statements from the summarized accounting data:
1. Income Statement

Brooms
2. Retained Earnings Statement
3. Statement of Financial Position
4. Statement of Cash Flows
(1) Betagun Inc.
Income statement
For the month ended September 30.20XX

Revenues:
't \Jill)
a.
Service revenue $4,700
Expenses:
Salaries expense 900
Rent expense 600
Advertising expense 250
Utilities expense 200

BB
Total expenses
Net Income

6
ACT1600 Fundamentals of Financial Accounting

(2) Betagun Inc.

BBB Retained Earnings Statement
:. For the Month Ended September 30. 20XX
Retained earnings, September I $ 0
Add: Net Income fagotsNet \os5 h'lll'lUS 2,750
2,750
Less: Dividends 1,300
Retained earnings, September 30 $1.450

a-
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ga
(3)
Betagun Inc.
Statement of Financial Position
September 30. 20XX

Current Assets:
Cash $8,050
Accounts receivable 1,400
Supplies 1.600
Total Current Assets $11,050

Non-Current Assets:
Property, Plant and Equipment:
Equipment

Total Assets
Liabilities and Shareholder's Equity
Liabilities:
Current Liabilities:
Accounts payable $1,600

Shareholders' Equity:
Share Capital- ordinary $ 15,000
Retained earnings, September 30 1,450

Total Liabilities and Shareholder's equity $18.050

BBggg3EEB@

7
ACT1600 Fundamentals of Financial Accounting

FORMAT OF STATEMENT OF FINANCIAL POSITION

ASSETS
· Current Assets:
Cash 9,000
Marketable securities 200
Accounts receivable 4,800
Notes receivable 5,000
Inventory 200
Supplies 1,800
Prepaid expense 1.400
Total Current Assets 22,400

Non-Current Assets:
Property, Plant and Equipment:
Land $11,500
Building 15,000
Less: Accumulated Depreciation-Building 1,000 14,000

Equipment 7,500
Less: Accumulated Depreciation-Equipment 500 7,000
Total Property Plant and Equipment $32,500

Intangible Assets ... 0 ....

Total Non-current Assets $32.500
Total Assets $5_4,900

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current Liabilities:
Notes Payable 4,000
Accounts Payable 3,000
Interest Payable 500
Salaries and Wages Payable 800
Unearned Revenue 1,000
Total Current Liabilities 9,300

Non-current Liabilities:
Mortgage Payable 12,000
Bank Loan 7,000
Bonds Payable 3,000
Total Non-current liabilities
Total Liabilities 31,300

Shareholders' egujty:
Share Capital-Ordinary shares $15,000
ag.gs
-202873g
.Retained Earnings 8,600
Total Shareholders' Equity 23.600
Total Liabilities and Shareholders' equity $54.900

Edta

8
 ACT1600 Fundamentals of Financial Accounting

PROBLEMS
Problem 1:
Romans Repair LTD was started on May 1, 20XX. A summary of May transactions is presented
\ below:
1. Shareholders invested $10,000 cash in the business in exchange for ordinary shares.
2. Purchased equipment for $5,000 cash.
3. Paid $400 cash for May office rent.
4. Paid $500 cash for supplies.
5. Incurred $250 of advertising costs in The Beacon News o;o. account.
6. Received $4,700 in cash from customers for repair service.
7. Declared and paid $1,000 cash dividends.
8. Paid part time employee salaries $1,000.
9. Paid utility bills $140.
10. Provided repair service on account to customers $980.
11. Collected cash of$120 for services billed in transaction (10).

Instructions: Prepare a tabular analysis of the transactions based on the accounting equation. The
accounts to be used are Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable,
Share Capital and Retained Earnings.

Cash+ AIR+ Supplies+ Equipment = AlP+ #Share Retained Remarks

Capital+ Earnings

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Problem: 2
On August 31, 20XX, the statement of financial position of Nash Veterinary Clinic showed
Cash $9,000, Accounts Receivable $1,700, Supplies $600, Equipment $6,000, Accounts Payable
$3,600, Share Capital-Ordinary $13,000, and Retained Earnings $700. During September, the
following transactions occurred. -33ft ot rw.gll.St
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1. Paid $2,900 cash for accounts payable due .... ' 4 >h,
2. Collected $1,300 of accounts receivable. -.
3. Purchased additional equipment for $2,100, paying $800 in cash and the balance on
account. TIL T
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4. Earned revenue of$7,300, ofwhich $2,500 is collected in cash and the balance is due in
-
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and paid a $400 cash dividend. -> cq1h,
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7. Incurreet' utilities expense for month on account $170. _,.

8. Received $10,000 from Capital Bank on a 6-month note
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re11t for September $900, and §ldvertisil1g expense $200 . ..., cash,

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9
 ACT1600 Fundamentals of Financial Accounting

Instructions:
(a) Prepare a tabular analysis of the September transactions beginning with August 31
balances. The column headings should be as follows; Cash + Accounts Receivable +
Supplies+ Equipment= Notes Payable+ Accounts Payable+ Share Capital+ Retained
Earnings.
(b) Prepare an income statement for September, a retained earnings statement for September
and a statement of financial position at September30, 20XX.
@0
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toss
Date Cash+ AIR+ Supplies+ Equip= NIP+ AlP+ Share+ Retained Remarks
Capital Earnings

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 ACT1600 Fundamentals of Financial Accounting

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 ACT1600 Fundamentals of Financial Accounting

Problem: 3
Riyo started a delivery service, Riyo Deliveries, on June l, 20XX. The following transactions
occurred during the month of June.
June l Shareholders invested $10,000 cash in the business in exchange for ordinary shares.
2 Purchased a delivery equipment for deliveries for $14,000. Riyo paid $2,000 cash
and signed a note payable for the remaining balance.
3 Paid $500 for office rent for the month.
5 Performed $4,800 of services on account.
9 Declared and paid $300 in cash dividends.
12 Purchased supplies for $150 on account.
15 Received a cash payment of$1,250 for services provided on June 5.
17 Incurred gasoline expense for the month on account $100.
20 Received a cash payment of$1,500 for services provided.
23 Made a cash payment of$500 on the note payable.
26 Paid $250 for utilities.
29 Paid for the gasoline expense incurred on account on June 17.
30 Paid $1,000 for employee salaries.

Instructions:
(a) Show the effects ofthe transactions on the accounting equation.
(b) Prepare an income statement for the month of June, 20XX.
(c) Prepare a statement of financial position at June 30, 20XX.

a)
Date Cash+ AIR+ Supplies+ Del: Equip= NIP+ A/P+ Share+ Retained Remarks
Capital Earnings

12
 ACT1600 Fundamentals of Financial Accounting

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*********************

13
ACT 1600 Fundamentals of Financial Accounting

CHAPTER2
THE RECORDING PROCESS
Objectives: After studying this chapter, you should be able to:
. Explain what an account is and how it helps in the recording process .
. Define debits and credits and explain their use in recording transactions .
. Identify the basic steps in the recording process .
. Explain what a journal is and how it helps in the recording process .
. Explain what a ledger is and how it helps in the recording process .
. Explain what posting is and how it helps in the recording process .
. Prepare a trial balance and explain its purposes.

The Account:
An account is an individual accounting record of increases and decreases in a specific asset, liability or
equity item.
In its simplest form, an account consists of three parts: (l J a title (2) a left or debit side, and (3J a right or
credit side.
An account can be illustrated in a T-account form as follows;

Account Name
Debit I Dr. Credit/ Cr.

Debits and Credits:

The term debit indicates the left side of an account, and credit indicates the right side.
They are commonly abbreviated as Dr. for debit and Cr. for credit. The act of entering an amount
on the left side of an account is called debiting the account. Making an entry on the right side is
crediting the account.
When comparing the totals of the two sides, an account shows a debit balance if the total of the
debit amounts exceeds the credits total. An account shows a credit balance if the credit total
exceeds the debits.
Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed
credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a
liability account should exceed debits to that account. The normal balance of an account is on the side
where an increase in the account is recorded.

Double-entry accounting system:

Each transaction must affect two or more accounts to keep the basic accounting equation in
balance.
Recording is done by debiting at least one account and crediting another.
DEBITS must equal CREDITS.

Assets
Debit/ Dr.

Normal Balance
•
Credit/ Cr.
Expense
Debit/ Or.

Normal Balance
.
Credit/ Cr.

"' "'

14
ACT 1600 Fundamentals of Financial Accounting

Liabilities Equity
Debit/ Dr. Credit/ Cr.

•
Debit/Or.

Normal Bafance

,.

Revenue

•
Debit/ Dr. Credit/Cr.

Normal Bataoco

'"

STEPS IN THE RECORDING PROCESS:

Every business uses three basic steps in the recording process.
1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
J( ;J
The Journal:
Companies initially record transactions in chronological order. Thus, the journal is referred to as the book of
original entry. For each transaction, the journal shows the debit and credit effects on specific accounts.
Companies may use various kinds of journals, but every company has the most basic form of
journal, a general journal. The journal makes several significant contributions to the recording process.
l. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be
easily compared.

Journalizing:
Entering transaction data in the journal is known as Journalizing. Companies make separate journal
entries for each transaction. A complete entry consists of (1) the date of the transaction (2) the accounts
and amounts to be debited and credited and (3) a brief explanation of the transaction.

Example: On September!, Shareholders invested $15,000 cash in Betagun Corporation in exchange for
ordinary shares, and on the same day, Betagun purchased equipment for cash $7,000.

GENERAL JOURNAL PAGE 1

Date Account Title &Explanation Ref Debit Credit
Sept.1 Cash 101 15,000
Share Capital- Ordinary 311 15,000
(Issued shares for cash)

Sept.l Equipment 201 7,000

Cash 101 7,000
(Purchased equipment for cash)

Simple and Compound Entries:

An entry that involves only two accounts, one debit and one credit is a simple entry.
(as shown above)
An entry that requires three or more accounts is a compound entry.

15
ACT 1600 Fundamentals of Financial Accounting

Example; On September 1, the Company purchases an equipment costing $10,000. It pays $8,000 cash
now and agrees to pay the remaining $2,000 on account.

GENERAL JOURNAL PAGE 1

Date Account Title &Explanation Ref Debit Credit
Sept. 1 Equipment 10,000
Cash 8,000
Accounts Payable 2,000

The Ledger:
The entire group of accounts maintained by a company is the Ledger. The ledger keeps in one place all
the information about changes in specific account balances.
Companies may use various kinds of ledgers, but every company has a general ledger. A general
ledger contains all the assets, liabilities and equity accounts.

Individual Individual Individual

Assets Liabilities Equity

Three- column form of account:

This is a more structured form of account. It has three money columns- debit, credit and balance. The
balance in the account is determined after each transaction. Companies use the explanation space and
reference columns to provide special information about the transaction.

CASH NO. 101

nate Explanatiun Ref. Debit Credit fiahmce
2011
June 1 25.000 25.000
2 8,000 17.0(1(1

') 7.500
17 11.700 17.000
20 250 [1).750
:m 9.450

Posting:
Transferring journal entries to the ledger accounts is called Posting.
Posting should be performed in chronological order. That is, the company should post all the debits and
credits of one journal entry before proceeding to the next journal entry. Postings should be made on a
timely basis to ensure that the ledger is up to date.

16
ACT 1600 Fundamentals of Financial Accounting

Date Explanation Rer. Debit Credit Balance

20l:L
Sept.1 J]; 10,000 10,000

Share Capital--ordinary
Date Explanation :aer. Debit Credit Ralance

2011
Sept.l Jl 10,000 10,000

Chart of Accounts:

The number and type of accounts differ for each company. The number of accounts depends on the
amount of detail the management desires. The chart which lists the accounts and the account numbers
that identify their location in the ledger is known as chart of accounts.

Chart of Accounts
Assets
101 Cash 311 Share Capital- Ordinary
112 Accounts receivable 320 Retained earnings
130 Prepaid Insurance 332 Dividends
157 Office Equipment
158 Accumulated depreciation- Office equipment Revenues
400 Service revenue

Liabilities Expenses
200 Notes payable 711 Depreciation expense
201 Accounts payable 726 Salaries expense
213 Salaries Payable 801 Rent expense

The Trial Balance:

A trial balance is a list of accounts and their balances at a given time. Companies prepare a trial balance
at the end of an accounting period. They list accounts in the order in which they appear in the ledger.
Debit balances appear in the left column and credit balances in the right column.
The steps for preparing a trial balance are:
1. List the account titles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.

17
ACT 1600 Fundamentals of Financial Accounting

Example:
Betagun Corporation
The Trial Balance
Sep1em
t b er 30 , 20XX
Account Account Title Debit Credit
No:
101 Cash $15,200
112 Supplies 2,500
116 Prepaid Insurance 600
126 Equipment 5,000
201 Notes Payable 5,000
209 Accounts Payable 2,500
211 Unearned Service Revenue 1,200
311 Share Capital-Ordinary 10,000
--
312 Dividends 500
400 Service Revenue 10,000
726 Salaries and Wages Expense 4,000
727 Rent Expense 900
Total $28,700 $28,700

Transaction analvsis
Step 1
Identify a minimum of two account names from a given transaction
Step 2
Decide whether the accounts identified in step l is an Asset, Liability, Share capital, Revenue,
Expense or Dividend account.
Step 3
Identify which account to debit and which account to credit

Rules of debit and credit Qq nccvuY\r - !

• Increase- Debit (Normal balance)

Asset
• Decrease- Credit

• Increase- Credit (Normal balance)

Liability
• Decrease- Debit

• Increase- Credit (Normal Balance)

Revenue
• Decrease- Debit

• Increase- Debit (Normal balance)

Expense
• Decrease- Credit
• Increase- Credit (Normal balance)
Share Capital
• Decrease- Debit

• Increase- Debit (Normal Balance)

Dividend
• Decrease- Credit
Note: Certain events or activities that happens in a business are not considered as transaction. To identify
whether an activity is a transaction the criterion is as follows:
u]s the financial position (assets, liabilities, or equity; of the company changed" because of that particular
event.
Examples of certain events that are not considered as transactions: Hiring of an employee, enter into an
agreement or signing a contract to do something in the future, place an order for something to be received in
the future.

18
ACT 1600 Fundamentals of Financial Accounting

Problems:

Problem 2-1:
Eva Le is a licensed accountant. During the first month of operations of her business, Eva Le Inc; the
following events and transactions occurred:

May 1 Shareholders invested $20,000 cash in exchange for ordinary shares.

2 Hired a secretary-receptionist at a salary of $2,000 per month.
3 Purchased $1,500 of supplies on account from Kara SupplyJ::ompany.
11 Completed a tax assignment and billed client $2,800 for services provided.
12 Received $3,500 advance on a management consulting engagement.
17 Received cash of $1,200 for services completed for Welky Co.
31 Paid secretary-receptionist $2,000 salary for the month.
31 Paid 40% of balance due to Kara Supply Company.
31 Paid office rent $900 cash for the month.
Eva Le uses the following chart of accounts: No.1 01 Cash, No.112 Accounts Receivable, No.l26 Supplies,
No.201 Accounts Payable, No.209 Unearned Service Revenue, No.311 Share Capital-Ordinary, No.400
Service Revenue, No.726 Salaries and Wages Expense and No.729 Rent Expense.

Instructions:
1. Journalize the transactions.
2. Post to the ledger accounts.
3. Prepare a trial balance on May 31, 20XX.

GENERAL JOURNAL Page 1

Date Account Titles and Explanations Ref Debit Credit
May 1

11

12

17

19
ACT 1600 Fundamentals of Financial Accounting

31

31

31

2. General ledgers
Cash No.101

Date Explanation Ref. Debit Credit Balance

Accounts Receivable No 112

Date Explanation Ref. Debit Credit Balance

Supplies No. 126

Date Explanation Debit Credit Balance
1 Ref. 1
I I I
I I I I I
Accounts Payable No. 201
Date Explanation Ref. Debit Credit Balance

20
ACT 1600 Fundamentals of Financial Accounting

Unearned Service Revenue No. 209

Date Explanation Ref. Debit Credit Balance

Share Capital - Ordinary No. 311

·-
Date Explanation Ref. Debit Credit Balance

Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance

Salaries & Wages Expense No. 726

Date Explanation Ref. Debit Credit Balance
I I
I I
Rent Expense No. 729
Date Explanation Ref. Debit Credit Balance

c.

Account Number Account Titles Debit Credit

21
ACT 1600 Fundamentals of Financial Accounting

Problem 2-2

Lyons Dental Clinic provides dental services to customers. The business transactions for June, 20XX are
shown below:
June 1 Shareholders invested $440,000 cash in the business in exchange for 1,000 shares.
June 2 Purchased dental equipment for $45,000. Made a $15,000 cash down payment and
issued a note payable for the remaining balance.
June 5 Medical Instruments were purchased for $75,000 cash.
June 10 Office fixtures were purchased from Home Pro for $25,000. Paid $10,000 at the time of
purchase and agreed to pay the remaining balance within 15 days.
June 11 Rendered services to customers for $13,000. Of this amount, $1,000 was collected in cash
and $12,000 was billed on account due in 30 days.
June 12 Ordered dental equipment worth $5,000. It will be delivered only next month.
June 13 A $450 invoice was received for newspaper advertisements placed in June. The entire
amount is due on July 8.
June 15 Borrowed $90,000 from a bank and signed a note payable due in six months.
June 18 Received a $2,000 payment on the amount due from patients of June 11.
June 22: Received cash $10,000 for services provided to patients.
June 25: Paid $100 cash for gasoline. All of this fuel will be used in June.
June 28: Received $1,000 cash from a patient. The services will be provided in July.
June 29: Paid the outstanding balance due to Home Pro for the purchase on JunelO.
June 30: Purchased office supplies costing $2,200 on account.
June 30: Paid salaries for the month $11,000.
The company uses the following chart of accounts:- No. 101 Cash, No. 112 Accounts Receivable, No.
136 Office Supplies, No. 145 Dental Equipment, No. 156 Medical Instruments No. 157 Office Fixtures,
No. 201 Accounts Payable, No. 211 Notes Payable, No. 220 Unearned Service Revenue, No. 311 Share
Capital - Ordinary, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, No. 735
Advertising Expense, No. 736 Gasoline Expense

Instruction:
1. Journalize the June transactions. (Explanations are needed)
2. Post to the ledger accounts.
3. Prepare a trial balance on June 30, 20XX.
GENERAL JOURNAL Pa e l
Date Account Titles and Explanations Ref Debit Credit

I
June 1 03 -

@
TESTEES 0 Coa

2 -
og
e

est
-

those • £ -

5 -
-
E -
•
Zehafas

10 as
g. E E
og
22
 ACT 1600 Fundamentals of Financial Accounting

Stare ne1 f.lI

'201 1l 0
p co.'J\1 aid !)(f\ X\ IH) uv1 j

11 -
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140 l )I 0
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15 '"j 11 101 rb
. t)OT 211 w,oo (7
-
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18 -
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←
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Actil\i1Yt 112 I

due to Jwn
( s\J I)

22

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Ct\)" tOY
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sn v1tt' \Hovi
:
101

4-UJ
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100)J_tJ
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25 1-3 1 o1l

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28 '1100 {)

←t_gggE%e
tSh 101

'l' u d I till! 2 '20

( C<15h 111 (\ tl fov the ;;:r-"l(t +o bll cor llp!,?h?C\ ft( y)

29 pc\y qb\e

Igoe
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101 15)10 il
cnsh 101 -
1lJ10 lO
(P<ill\ uL+o of .

30

*gggsTt£ rfuvc\,a) t\
c(.oVv'li
"H 11: e
Y!\" \ c:
illtfli< cvedii I
IH

201
3
2,:200
2 1 2 Oil
•

23
ACT 1600 Fundamentals of Financial Accounting

§
30
grape
-
OJ
'I g
-

2. General Ledgers

Cash No. 101

Date Explanation Ref Debit Credit Balance
e J1 e
4-lt.QI 0 0 0 ←
440,00 0
ga
'I

2
- .Ji SE
1 E
<;
- Jj
e -
1') 100() @
\)0 00\J
-
"'ll G
Y\ 'JO,otlo
- 3e..o,ooo
e
'\i
- 11
D e
'tO' g-
- -
J'1 - G
c
'1'6 8
J! es
2oob lfB,000
e
'
11
C G
J) '10 {j - ou C
f tQOil
go 100
•
'l.t:; J1 so
c J1 ,,Gob
e -
C
]_'\ J1
E g-
\ s!oa 0 -
l\1.t;!tl00
30
C J1
• @ seat

Accounts Receivable No. 112

Date Explanation Ref. Debit Credit Balance
11.1m 11
s
11,0 ll,0%10
I
-
s Jj 2,ooc
- ·10tO 16

Office Supplies No. 136

Date Explanation Ref. Debit Credit Balance
←
)b
J'l
8- 111 oI
I t,l!
f -

Dental Equipment No. 145

Date Explanation Ref. Debit Credit Balance
1
- e @
4S,G0!J r::; ,!J:j{)
C

Medical Instruments No. 156

Date Explanation Ref. Debit Credit Balance

5
& J1
I )) ,ooo
@ rS' ,oo
T

Office Fixtures No. 157

Date Explanation Ref. Debit Credit Balance
10 -
J1 -
1'5, 0 -
2) {JJQ

24
ACT 1600 Fundamentals of Financial Accounting

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
> J,
e- -
'I' C T
1S,OdJ

s
1) Jl
e -
4SO e
15,45('
lq
s e
]1 1S,o o
@ Ho
@
I 10 0 1,100
So I
2.,G 0

Notes Payable - No. 211

Date Explanation Ref. Debit Credit Balance
s 4 e
J1 :1 1 ooo
← -)0 10tl

s Jl
e eq o1OotJ -
1 'J1l,OOo

Unearned Service Revenue No. 220

Date Explanation Ref. Debit Credit Balance
→ o
r1 1 00
- ,, 0
-

Share Capital - Ordinary No. 311

Date Explanation Ref. Debit Credit Balance
·)
v J'l
e If-to ,oou
-
Is
'l· I- il OlJO

Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance
- 31000
C C
IJ 101 tl

e
'1.2 1 0 ,o 0 0
- 'L] 1 ooo
-

Salaries & Wages Expense No. 726

Date Explanation Ref. Debit Credit Balance

-
1)0 e
1 1 rJo -
: iOO
1

Advertising Expense No. 735

Date Explanation Ref. Debit Credit Balance
n
J J C
Q')ll C
4){]

Gasoline Expense No. 736

Date Explanation Ref. Debit Credit Balance
2"5
- e
1 Db -
bU

25
ACT 1600 Fundamentals of Financial Accounting

c.

g-

Iq
Account
Number
-
Account Titles

-
Debit Credit

I -39J I
% It -5
I Tae Eg
16)0

q Tf Is
'
€
tosspot It
%
ago 55 @

Problem 2-3
FM Broadcasting was organized on April 30 to operate a local radio station. The account titles,
numbers and beginning balances on May 1, 20XX are as follows:

110 Cash $300,ooo

E.
ilr 202 Uneamed service revenue
150
180
Accounts receivable
Su_pplies
$2,000 DV 300
301
Share capital
Retained eamings
ordinary $300,000 Ci
$2,000 :cv
191 Prepaid insurance 400 Service revenue
192 Eguipment $150,000 ←
Ov 500 Rent expense
194 Film Library 501 Salaries expense
200 Notes payable 502 Utilities expense
201 Accounts payable $150,000 S
c!

The transactions of May were as follows:

1 Bought supplies costing $100 on account from Drago Co.

3 Purchased a film library at a cost of$30,000 from Godom Co; making a cash down payment of
$15,000 cash, with the balance payable in 30 days.
5 Collected $50,000 cash for radio advertising services provided.
7 Billed Kong Co. for $70,000 for radio advertising services rendered during the first week of May.
The agreement with Kong called for payment to be received by May 29.
9 Mr. Eiden paid $9,000 in advance for advertising services to be provided in June.
11 Provided advertising services on account for KIMS Hospital $11,000.
26
ACT 1600 Fundamentals of Financial Accounting

13 Borrowed $13,000 from Axis bank by issuing a 12%, 3 months note.

15 Paid insurance premium in advance for one year $1,500.
17 Issued a check of $17,000 to Gono in payment of an accounts payable incurred on April 30.
19 Purchased photocopy equipment on account $1,900 from Sanyo Co.
21 Rent expense for May of $2,100 will be paid on June 1.
23 Collected cash of $2,300 from Kong, a credit customer.
25 Paid employees' salaries for May $25,000.
27 Utilities expense for May $2,700 will be paid on June 7.
..
Instructions:
a. Journalize the transactions with the explanation.
b. Post to the ledger accounts.
c. Prepare a trial balance as of May 31, 20XX fr
GENERAL JOURNAL Page 1
Date Account Titles and Explanations Ref Debit Credit
May 1 •
'lvpphE 1160
I
6100
-
i\CcOU\1 r Vll ';q 1)\ ·•
@ lOi t 100
←
.
.
( pliYC\\l\ suvy\ Gn

-
I(((JV If]

3 ') fJ t I$ 3o,ooo

I Ees
\,\;loiV .

tn sII 110 I$ '!')(JOb

tragopanrpu1<'.: •sert
{\(('Jl\1\t
•br:·, y'
\)(\}(1\::\e
hHf rnn'l' t ,nd t\·
1.01
., '9 \ un n'nd·J
11'5 ooo

5 Ul Sh p5i,: J{:
e
E
'11:)

tg C
Stt';' '" H\'llht c
rd cosh -1\lv 1\.e
+oo -
J"O,ooo

7 H·o,()oo
s -
!I·J 0.\cl( ihO
g fYV Itt H VfV\\A£
q. 0 0 $ 701000
-
(&\II ea c\IQ\l
I T t 1 v e1oi' J

9 ←
co.•,Y, C q,o 00
110 t
a
V\1t 1,1f\vd s f
rrve1·,ll\: $q,ooo
g

g-eoGTI-5-t-t-oap.ES
1 c t5l'• In 1d1nntc +mn \in
seYvice)
11 A<,(Q\.Int r ec t i ve u'vi t 1)0

5emc e V€ rl\\le 400 I 111

strvict ov, tiCCOcmtl

13 \II 110 1 1 3I \lOU

2. 0 0 f13,000
( (!ASh Cl\1 Ct. ,3 ffiOI\1\v) hate)

15 ,.l (f \

top E es
/PCil\\ 1'<\ Cil\ ( £ $11')0 0
IIJ ;r v 1) u0
c£\Sh •
[ V(li ·,i!\l\!f\I'JCQ IY\ \U to l 1

27
ACT 1600 Fundamentals of Financial Accounting

1 n,ooo_
E
17 1\cco\1'111 101 -

Tegh
Q'o\e
((I'Jh 110 £
i ft,ooo
or ;f 1\ 31;)

\qu.iym ,q l
IS
19

IT
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cco11,nt pQy(t' It 10 ←
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lPU! VI'\ e ,1

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10;)
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23 cu )VI $ ·d)
Ee
- l

wrl 50 t
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obi' 'I -
( )\\ eel, CU'i 1om d (:\Jt:;n

25 I\ p 'l 'JJ; ,o'J

-
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no $1 !i]!}
←
q' . ,, l
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I
27 \It\ h t\ '5

oEs2g
(\! S02 -
1' 11iJC
AC( rCI'f'' IJ\e 2JJ1 i
= H\.hl
ll: '1 exye111e ( 1 H
I

2. General Ledgers

Cash No. 110

Date Explanation Ref Debit Credit Balance

7
rnqy 1
.
3
-

EI
J1
J

J ·:
1110,, I{)

tl:;
- l '
E
!,'''·
2'6S}l\J
3 'b <; ,Lu'J

EE
IV !tJ

°
3
ez
J1
:'13 9,00 31'{,
n 1j,OOO :;'700
35 S', ;u·
? I
]')

EFF goat
111 \ ':)OU
o J1 l't! j)b1 S0U
2J 21 oo
s IJ ·{
jiS J1
E
J !':l 10av j15L QQ

28
 ACT 1600 Fundamentals of Financial Accounting
I
Accounts Receivable No. 150
Date Explanation Ref. Debit Credit Balance
(1](( y ']
G fi,,l,, .·:r •.
I- e
j
← I E
2_V0b
I

G C
;, Ie
,, .• , () (· l S
12.WJ
&
11 &
"
;,' j S
'I ()O (: f
K obo
e
J1
q
2,30 Sg
Supplies No. 180
Date Explanation Ref. Debit Credit Balance
-
it ..,
1 '/ z
Jr\ 1u0
e -
1 'j(JIJ

Prepaid Insurance No. 191

Date Explanation Ref. Debit Credit Balance
(:i !\' i ..•
TG ::n
g es
\'IOO -
11 ·so

c
Equipment No. 192
Date Explanation Ref. Debit Credit Balance
T
;·ryl\/ ·, C I
J 15o1ooo
e- -
1'iO ,OOU
C
il] 0; '/ 1 C( J1
tf 1 00
Eg
I
Tf
15),'100

Film Library No. 194

Date Explanation Ref. Debit Credit Balance
(J')r\y J
s •
J1 lo, oo 'J
← :,a 10J 'J
s

Notes Payable No. 200

Date Explanation Ref. Debit Credit Balance

C·l
C J1
G g
1} 1 oO () j ,oo
S

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
..ll!'q
T ,, .. 'I fJ·,II'l I.'
g J
B- ;'io 10(J,:
C &
'! c; ·' I

I
I 11
3. C
]rJ ·] GG ,'I}',

0
& Ze
1l f
\ '5 10') IJ Se
.; ',',, I
It
Eg S
Jj Is
'i 'J/.ll 1'
1
G-
''; i

,..,
!''

I £ -
·1 n'IO C
,·, '.,'' .:.
1 1
2.
g- -8
T1 l 1 7t 1
Tf T
'1 21 y10 b

3-
I

17·
• I
]1 &J 51h boo
7 'I '.li'

Unearned Service Revenue No. 202

Date Explanation Ref. Debit Credit Balance
tf
y: J]
G E
'1, '1,
TE

29
ACT 1600 Fundamentals of Financial Accounting

Share Capital Ordinary No. 300

Date Explanation Ref. Debit Credit Balance
Ig f- of
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Retained Earnings No. 301

Date Explanation Ref. Debit Credit Balance

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Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance

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Rent Expense No. 500

Date Explanation Ref. Debit Credit Balance

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Salaries Expense No.'501

Date Explanation Ref. Debit Credit Balance
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Utilities Expense No. 502
Date Explanation Ref. Debit Credit Balance
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Account Titles Debit Credit

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30
ACT 1600 Fundamentals of Financial Accounting

Problem2-4

Muanim company was organized on October 1, 20XX to provide transportation for office and
household furniture. The account titles, numbers and beginning balances on November 1 are as follows:

110 Cash $300,000 202 Unearned service revenue

150 Accounts receivable $100,000 300 Share capital -ordinary $200,000
180 Land 301 Retained earnings $102,000
191 Equipment $52,000 302 Dividends
192 Building 400 Moving service revenue
194 Trucks 500 Gasoline expense
200 Notes payable 501 Salaries expense
201 Accounts payable $150,000 502 Utilities expenses

The transactions for November were as follows:

1 Paid the amount due of $30,000 on the October 20 invoice, from EquipTox Company.
3 Purchased land for $170,000 and building for $360,000 and signed a note payable for the same
to Meanoi Company.
5 Purchased six moving vans from Kotono Company at a totaL cost of$ 300,000. A note payable
was issued for the purchase price.
7 Collected $80,000 of the amounts billed to Miss Susy, a customer on October 29.
9 Additional investments were made by the shareholders in exchange for ordinary shares $200,000.
11 Moved furniture for various clients for $50,000 and collected the cash in full.
13 Mr. Stup paid $8,000 in advance for services to be provided in December.
15 Paid dividends to shareholders $8,000.
17 Paid $300,000 to Kotono Company for the amount due.
19 Purchased facsimile equipment on account $1,900 from Son yo Co.
21 Moved furniture for Wook Adver Agency from New york to LA for $29,500 on credit.
23 Received a gasoline bill for the month of November from Red Gas in the amount of $25,000 to
be paid by December 10.
25 Paid salaries to employees for services rendered in November $19,000.
27 Accrued utilities expense not yet paid for November $6,000.
Instructions:
a. Journalize the transactions with the explanation.
b. Post to the ledger accounts.
c. Prepare a trial balance as on November 30, 20XX.

GENERAL JOURNAL p age

Date Account Titles and Explanations Ref Debit Credit
Nov. 1

31
ACT 1600 Fundamentals of Financial Accounting

11

13

15

17

19

21

23

25

27

32
ACT 1600 Fundamentals of Financial Accounting

2. General Ledgers
Cash No. 110
Date Explanation Ref Debit Credit Balance

'""

Accounts Receivable No. 150

Date Explanation Ref. Debit Credit Balance

Land No. 180

Date Explanation Ref. Debit Credit Balance

Equipment No. 191

Date Explanation Ref. Debit Credit Balance

Building No. 192

Explanation Debit Credit

Trucks No. 194

I Date
I Explanation I Ref. I Debit Credit
I Balance
I
I I I I I I
Notes Payable No. 200
Date Explanation Ref. Debit Credit Balance

Accounts Payable No. 201

Explanation Debit Credit

33
ACT 1600 Fundamentals of Financial Accounting

l Unearned Service Revenue

I I

No. 202
Date Explanation Ref. Debit Credit Balance

Share Capital - Ordinary No. 300

Date Explanation Ref. Debit Credit Balance

Retained Earnings No. 301

Explanation Debit Credit

Dividends No. 302

Explanation Debit Credit

Moving Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance

Gasoline Expense No. 500

Explanation Debit Credit

Salaries Expense No. 501

Explanation Debit Credit

Utilities Expense No. 502

Explanation Debit Credit

c.

Account Account Titles Debit Credit

Number

34
ACT 1600 Fundamentals of Financial Accounting

Problem 2-5
MR Printing Company provides typing, duplicating, and printing·services to customers. The following
transactions were completed by the Company during July.

July 1: Issued 1,000 shares of share capital in exchange for an investment of $400,000 cash.
July 2: Purchased land and a small building for $450,000, paying $165,000 cash and signing a note
payable for the balance. The land was considered to be worth $240,000 and the building
$210,000.
July 5: Purchased office equipment for $30,000 from Quality Interiors Limited. Paid $17,000
cash and agreed to pay the balance within 60 days.
July 10: Purchased a motorcycle on credit for $3,400 to be used for making deliveries to customers and
agreed to make payment to Spokes Limited within 10 days.
July 11: Performed printing services to customers on account $2,000.
July 12: Paid in fhll the accounts payable to Spokes Limited.
July 13: Made a $60,000 cash payment on the note payable from the purchase of land.
July 15: Borrowed $30,000 from a bank and signed a note payable due in six months.
July 18: Paid $1,500 cash for a one-year insurance policy.
July 22: Received cash $7,000 for printing services provided.
July 25: Incurred advertising expense on account $500.
July 28: Declared and paid $1,000 as cash dividends.
July 29: Received $9,000 for services to be performed from August 1 to September 30.
July 30: Collected cash of$1,500 for services performed on July 11.
July 31: Paid salaries for the month $9,000.

The company uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 136
Prepaid Insurance, No. 145 Office Equipment, No. 156 Land, No. 157 Building, No.l58 Motorcycle, No.
201 Accounts Payable, No. 211 Notes Payable, No. 220 Unearned Service Revenue, No. 311 Share Capital-
Ordinary, No. 320 Dividends, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, No. 735
Advertising Expense
Instruction:
1. Journalize the July transactions. <Explanations are needed)
2. Post to the ledger accounts
3. Prepare a trial balance on July 31, 20XX.

35
ACT 1600 Fundamentals of Financial Accounting

GENERAL JOURNAL Page 1

Date Account Titles and Explanations Ref Debit Credit
July 1

10

11

12
--

13 I

15

18

22

36
ACT 1600 Fundamentals of Financial Accounting

25

28

29

30

31

2. General Ledgers
Cash No. llO
Date Explanation Ref Debit Credit Balance

Accounts Receivable No. 112

Date Explanation Ref. Debit Credit Balance

37
ACT 1600 Fundamentals of Financial Accounting

Prepaid Insurance No. 136

Explanation Debit Credit

Office Equipment No. 145

Explanation Debit Credit

Land No. 156

Explanation Debit Credit

Building No. 157

Explanation Debit Credit

Motorcycle No. 158

Explanation Debit Credit

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance

Notes Payable No. 211

Date Explanation Ref. Debit Credit Balance

Unearned Service Revenue No. 220

Date Explanation Ref. Debit Credit Balance

Share Capital- Ordinary No. 311

Explanation Debit Credit

Dividends No. 320

Explanation Debit Credit

Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance

38
ACT 1600 Fundamentals of Financial Accounting

Salaries and Wages Expense No. 726

Explanation Debit Credit

Advertising Expense No. 735

Explanation Debit Credit

c.

Account Account Titles Debit Credit

Number

39
ACT 1600 Fundamentals of Financial Accounting

CHAPTER3
ADJUSTING THE ACCOUNTS
Objectives: After studying this chapter, you should be able to:
. Explain the time period assumption .
. Explain the accrual basis of accounting .
. Explain the reasons for adjusting entries .
. Identify the major types of adjusting entries .
. Prepare adjusting entries for deferrals and accruals .
. Describe the nature and purpose of an adjusted trial balance.

Timing Issues
The economic life of a business is divided into artificial time periods which is referred to as the time
period assumption.
The time pedod assumption states that the life of a business can be divided into equal time periods.
These time periods are known as accounting periods for which companies prepare their financial
statements to be used by various internal and external parties.
The length of accounting period to be used for the preparation of financial statements depends on the
nature and requirement of each business as well as the need of the users of financial statements.

Fiscal and Calendar Years

Accounting time periods are generally a month, a qtlarter, or a year. Monthly and quarterly time periods
are called interim periods. Most large companies must prepare both quarterly and annual financial
statements.
An accounting time period that is one year in length is a fiscal year. A fiscal year usually begins with
the first day of a month and ends 12 months later on the last day of a month. Most businesses use the
calendar year January I to December3l as their accounting period.

Accrual-Basis Accounting
+ Transactions are recorded in the periods in which the events occur.
+ Revenues are recognized when the services are performed, rather than when cash is
received.
+ Expenses are recognized when incurred, rather than when paid.

Recognizing Revenues and Expenses

It can be difficult to determine when to report revenues and expenses. The revenue recognition principle
and the expense recognition principle help in this task.

Revenue Recognition Principle

The accounting guideline requiring that revenues be shown on the income statement in the period in
which they are earned, not in the period when the cash is collected. This is part of the accrual basis of
accounting. In a service enterprise, revenue is considered to be earned at the time the service is
performed.

Expense Recognition Principle

The expense recognition principle states that expenses should be recognized in the same period as the
revenues to which they relate.
It dictates that expenses be matched with revenues in the period when the company makes efforts to
generate those revenues. "Let the expenses follow the revenues."

Adjusting Entries
Adjusting entries ensure that the revenue recognition and expense recognition principles are followed.
Adjusting entries are necessary because the trial balance may not contain up-to-date and complete
data. This is true for several reasons.
I. Some events are not recorded daily because it is not efficient to do so.
2. Some costs are not recorded during the accounting period because these costs expire with the
passage of time rather than as a result of recurring daily transactions.
3. Some items may be unrecorded.

40
ACT 1600 Fundamentals of Financial Accounting

Adjusting entries are required every time a company prepares financial statements.
Every adjusting entry will include one income statement account and one statement of financial
position account.

TYPES OF ADJUSTING ENTRIES

Adjusting entries are classified as either deferrals or accruals.

Deferrals:
1. Prepaid expenses: Expenses paid in cash before they are used or consumed.
2. Unearned Revenues: Cash received before services are performed.

Accruals:
1. Accrued Revenues: Revenues for services performed but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Adjusting Entries for Deferrals

PREP AID EXPENSES

• When companies record payments of expenses that will benefit more than one
accounting period, they record an asset called prepaid expenses or prepayments.
• When expenses are prepaid, an asset account is ·increased to show the service or
benefit that the company will receive in the future.
• Prepaid expenses are costs that expire either with the passage of time or through use.
• Adjusting entries are required to record the expenses applicable to the current
accounting period and to show the remaining amounts in the asset accounts.

Prepayments occur in regard to; insurance, supplies, rent, advertising, building, equipment

Asset Expense
Unadjusted Credit Debit
Balance Adjusting Adjusting
Entt"Y (-) Entr·y (+)

Illustration: On Oct 1, 2019, paid $12,000 for one-year rent. Accounting period is one year,
20xx.

Cash

SUPPLIES
• The purchase of supplies results in an increase to an asset account.
• During the accounting period, the company uses supplies. Rather than record supplies expense
as the supplies are used, companies recognize supplies expense at the end of the accounting
period.
• At the end of the accounting period, the company counts the remaining supplies.
• The difference between the unadjusted balance in the Supplies account and the actual cost of
supplies on hand represents the supplies used for the period.

41
ACT 1600 Fundamentals of Financial Accounting

Illustration: Pollamer Agency purchased supplies costing $2,500 on October 1.

Journal
ret 1 I Su plies 2,500 I
Cash 2,500

An inventory count at the close of business on October 31 reveals that$ 1,000 of supplies is
still on hand.

Depreciation
•!• Buildings, equipment, and vehicles (assets with long lives) are recorded as assets, rather than an
expense, in the year acquired.
•!• The loss in the value of a non-current asset (fixed asset) due to its continuous use and old age is
termed as depreciation.
•!• In accounting principles, depreciation allocates a portion of the asset's cost as an expense during
each period of the asset's useful life.

Book value= Original cost- Accumulated. Depreciation

(The value at which an asset is carried on the statement of financial position)

Illustration: For Pollamar Agency, assume that depreciation on the equipment is $480 a year,
or $40 per month.
Ad.
uus f mu en t ry:
Oct 31 Depreciation Expense
40
Accumulated Depreciation-Equipment 40

{Note: Accumulated Depreciation is called a contra asset account/

DEPRECIATION METHODS:
Depreciation is computed using one of the following methods:
1. Straight Line Method
2. Units- of- Activity Method
3. Declining Balance Method
Important Note: If an asset is used for few months in the year of purchase, compute depreciation
only for those months (no. of months used/ 12).

{If an asset is used for less than 15 days in the month of pur·chase, do not count that month for
calculating depreciation.}

Straight-Line Method
•!• To compute depreciation, companies need to detem1ine depreciable cost. Depreciable cost is the
cost of the asset less its residual value.
Formula:
(Cost- Residual Value)+ Estimated useful life (in years)
Illustration: A tmck was purchased by Minbin Co on January!, 20xx.
Cost $13,000
Expected Residual Value $1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

42
ACT 1600 Fundamentals of Financial Accounting

Depreciable cost is 13,000- 1,000 = $12,000

Annual depreciation expense is 12,000-;-5 = $2,400
Units-of-Activity Method
•!• Under this method, useful life is expressed in terms of the total units of production or use
expected from the asset. It is used for those assets with production capacity. Example, Factory
Machinery
Formula:
{(Cost- Residual Value)-;- Estimated Useful Life (in miles)} x Units of Activity during the year

Assume actual miles the truck was driven in the first year was 15,000 miles.

Depreciable cost per unit is (13,000-1,000) -;-IOO,OOO = $0.12,

Annual depreciation expense is $0.12 x15,000 miles= $1,800

Declining-Balance Method
•!• This method produces a decreasing annual depreciation expense over the asset's useful life.
•!• Unlike other depreciation methods, the declining balance method does not use depreciable cost
in computing annual depreciation expense. That is, it ignores residual value.
•!• Depreciation expense is computed on the book value of the asset.
•!• A common declining-balance rate is double the straight-line rate. The method is often called the
double-declining-balance method.

Formula:
Book Value at beginning of year x Declining-balance rate= Annual depreciation expense

OR

(Cost- Accumulated depreciation) x ...... 2 ..... .

Useful Life

Year l = (13,000- 0) x = $5,200

5
Year 2= (13,000-5,200) = $3,120
5
Year 3= ( l3,000-8,320)x = $1,872
5

UNEARNED REVENUE
o When companies receive cash before services are performed, they record a liability called
unearned revenue.
o The company subsequently recognizes revenues when it perfonns the service. During the
accounting period, it is not practical to make daily entries as the company provides services.
Instead, the company delays recognition of revenue until the adjustment process.
o Then, the company makes an adjusting entry to record the revenue for services performed during
the period and to show the liability that remains at the end of the accounting period. The
adjusting entry for unearned revenues results in a decrease to a liability account and an increase
to a revenue account.

Liability Revenue
Unadjusted
Balance

Revenue (Find the answer for the credit account)

43
ACT 1600 Fundamentals of Financial Accounting

Illustration: Pollamar Agency received $1,200 on October 1 from Nano for advertising services
expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in
the October 31, trial balance. Analysis reveals that the company earned $ 400 of those fees in October.
Accounting period is one month that is October.

Unearned Service Revenue

Service Revenue

Illustration: On Nov. 1, 20xx, received $3,000 in advance for one year from a customer for services to
be rendered in the future. Accounting period is one year, 20xx.

Unearned Revenue

On Dec. 31, 2 months revenue has been earned. Therefore,

Adjusting Entries for Accruals

Accruals are made to record
• Revenues for services performed
OR
• Expenses incurred
in the current accounting period that have not been recognized through daily entries.

ACCRUED REVENUE
o Revenues for services performed but not yet recorded at the statement date are accrued revenues.
o Accrued revenues may accumulate with the passing of time, as in the case of interest revenue.
These are unrecorded because the earning of interest does not involve daily transactions.
o Companies do not record interest revenues on a daily basis because it is often impractical to do
so.
o Accrued revenues also may result from services that have been performed but not yet billed or
collected, as in the case of commissions and fees.
An adjusting entry for accmed revenues results in an increase to an asset account and an increase to a
revenue account.

Asset Revenue
Debit Cr·edit
Adjusting Adjusting
Encry (+) Entry (+)

Illustration: On October 31, Pollamar Agency recognized $200 for advertising services performed
but not recorded (received cash). (Accounting period is one month, October)

44
ACT 1600 Fundamentals of Financial Accounting

ACCRUED EXPENSES
o Expenses incurred but not yet paid or recorded at the statement date are called accrued expenses.
Interest, taxes and salaries are common examples of accrued expenses.
o Companies make adjustments for accrued expenses to record the obligations that exist at the
statement of financial position date and to recognize the expenses that apply to the current
accounting period.

An adjusting entry for accrued expenses results in an increase to an expense account and an increase to a
liability account.

Expense Liability
Debit Credit
Adjusting Adjusting
(+) (+)

Adjusting entry
I Dec 31 I Expense XXX
Payable XXX

Illustration: October 31, accrued salaries are calculated to be $1,200.

Accounting period is month of October.
Ad·ustin entr
1,200

Illustration: Pollamar Advertising signed a three-month note payable in the amount of $5,000 on
October 1. Accounting period is the month of October. The note requires Pollamar to pay interest at an
annual rate of 12%.

Face Value of Note x Annual Interest Rate xTime in Terms of one year= Interest

$5,000 X 12% X 1112 $50

50

XXX

XXX

Type of adjustment Accounts before adjustment Adjusting entry

Prepaid expense Assets overstated Dr. Expenses

Expense understated Cr. Assets
Or Contra asset
Unearned revenue Liabilities overstated Dr. Liabilities
Revenue understated Cr. Revenues

45
ACT 1600 Fundamentals of Financial Accounting

Accrued revenue Assets Dr. Assets

Revenues understated Cr. Revenues

Accrued expenses Expenses understated Dr. Expenses

Liabilities understated Cr. Liabilities

The Adjusted Trial Balance

+ Prepared after all adjusting entries are journalized and posted.
+ Purpose is to prove the equality of debit balances and credit balances in the ledger.
+ It is the primary basis for the preparation of financial statements
Financial Statements are prepared directly from the Adjusted Trial Balance

Pollamer Agency Inc. Pollamer Agency Inc

Adjusted Trial Balance Income statement
October 31, 20xx For the month ended October 31, 20xx
Account Debit Credit
Cash $ 15,200 Revenue
Accounts receivable 200 Service revenue $ 10,600
Supplies 1,000
Prepaid insurance 550 Expenses
Equipment 5,000 Salaries expense 5,200
Accum depre- Equipment 40 Supplies expense 1,500
Notes payable 5,000 Rent expense 900
Accounts payable 2,500 Insurance expense 50
Interest payable 50 Interest expense 50
Unearned service revenue 800 Depreciation expense 40
Salaries Payable 1,200
Share Capital- Ordinary 10,000 Total expenses
Retained earnings 0 Net Income
Dividends 500
Service revenue 10,600 Pollamer Agency Inc.
Salaries expense 5,200 Retained Earnings Statement
Supplies expense 1,500 For the month ended October 31, 20xx
Rent expense 900
Insurance expense 50 Retained Earnings, October I 0
Interest expense 50 Add: Net Income 2,860
Depreciation expense 40 2,860
$30,190 $30, 19ij Less: Dividends 500
Retained Earnings , October 31 $ 2_.16Q

{Note: $ 2,360 will go to Statement of Financial

Position}

SUMMARY OF THE ADJUSTING ENTRIES·

Date Account Name Debit Credit
1. Preuaid Exuense
( ••••••••••••••• )Expense XX
Prepaid( ............ ) XX

2. Suuulies
Supplies expense XX
Supplies XX

3. Unearned Revenue
Unearned Service Revenue XX
Service Revenue XX

4. Accrued Revenue
( ...........)Receivable XX
( ..........) Revenue XX
5. Accrued Exuense
( •••••••••••• )Expense XX
( ........... )Payable XX

6. Depreciation Expense XX
Accumulated Depreciation XX

46
ACT 1600 Fundamentals of Financial Accounting

EXERCISES
Exercise. I
On October 1, 2018, Goody Company collected $3,000 for 3 months for services they will have to
complete by December 31, 2018. Compute the amount they have earned at the end of November, 2018,
end of one-month accounting period and record the adjusting entry on that date.

Date Account Title Debit Credit

Exercise.2
Rachel Company bought a machine for $100,000. Salvage value is $4,000. Rachel estimates that the
useful life of the machine is 150,000 units. The actual usage for the first year is 20,000 units. Rachel
uses the units-of-activity method. Record the adjusting to record the depreciation expense for the first
year.

Date Account Title Debit Credit

Exercise.3
Freddy Advertising signed a 3- month note payable in the amount of $7,000 on October I. The note
requires Freddy to pay interest at an annual rate of 15%. Record the adjusting entry for the accrued
amount on October 31.

Date Account Title Debit Credit

Exercise.4
Kruger Co uses the straight-line method to record deprecation for their machine which costs $15,000,
which has a useful life of 5 years and an expected salvage value of $2,000. The machine is expected to
be used for 10,000 working hours during its 5- year life. Record the adjusting entry for depreciation
expense for the first year.

Date Account Title Debit Credit

Exercise.S
Dooty Company bought a delivery truck for $80,000. Dooty estimates that the useful life of the truck is
4 years with a $5,000 salvage value remaining at the end of that time period. Dooty uses the double-
declining balance method. Record the adjusting entry for depreciation expense at the end of the third
year.

47
ACT 1600 Fundamentals of Financial Accounting

Date Account Title Debit Credit

Exercise.6
PSC Company purchased a car on July 1, 2018 at a cost of$ 20,000 with an estimated residual value of
$1,500 and useful life of 5 years. Prepare the adjusting entry for Depreciation Expense at the end of
December 31,2019 using Double-Declining Balance method.

Date Account Title Debit Credit

Exercise.?
Prepare adjusting entries for the following independent situations. Assume one-year accounting
period.

1) The balance in the supplies account before adjustment shows a balance of $800. An inventory
count indicates that supplies costing $100 are on hand at the end of the one- year accounting
period. Prepare the necessary adjusting entry at year end.
2) Northern Airlines Company has a balance of $300,000 in the unearned revenue account at the
end of the one- year accounting period. Cancelled ticket information indicates that $200,000 of
this $300,000 has been earned. Prepare the necessary adjusting entry.
3) The company received a 10%, 9 months note of $12,000 from a customer on May l, 2018.
Adjust the accmed interest on this note on December 31, 2018.
4) On January 1, 2018, Kamamura Corporation paid $12,000 for a 3-year insurance contract.
Prepare the adjusting entry at December 31, 2018, if Kamamura Corporation uses one-year
accounting period.
5) Rendered services to customers for $750 but was unbilled at December 31, 2018. Prepare the
necessary adjusting entry on this date.
6) Accmed salaries incurred but not yet paid at the end of the current accounting year is $400.

Date Account Title Debit Credit

48
ACT 1600 Fundamentals of Financial Accounting

PROBLEMS

Problem 3-1:

Yilmaz Corporation encounters the following situations.

1. Yilmaz collects $1,750 from a customer in 2017 for services to be performed in 2018.
2. Yilmaz incurs utility expense $100 which is not yet paid in cash or recorded.
3. Yilmaz employees worked 3 days in 2017 but will not be paid until2018.
4. Yilmaz provides services for a customer but has not yet received cash or recorded the
transaction.
5. Yilamaz paid $2,400 rent on December 1 for the 4 months starting December 1.
6. Yilmaz received cash $1,000 for future services and recorded a liability until the service was
performed.
7. Yilmaz performed consulting services for a client in December 2017. On December 31, it had
not billed the client for services provided of $1,200.
8. Yilmaz paid cash $200 for an expense and recorded as an asset until the item was used up.
9. Yilmaz purchased $750 of supplies in 2017; at year end, $400 of supplies remain unused.
10. Yilmaz purchased equipment on January 1, 2017; the equipment will be used for 5 years.
11. Yilmaz borrowed $10,000 on October 1, 2017; signing an 8% one-year note payable.

Instructions:
Identify what type of adjusting entry is needed in each situation at December31, 2017.

')

<
Ll

<;

1!1

11

Problem 3-2:
The ledger ofVenessa Rental Agencies on March 31 of the current year includes the selected accounts,
shown below, before adjusting entries have been prepared.

Debit Credit
Prepaid Insurance $3,600
Supplies 2,800
Equipment 25,000
Accumulated depreciation-equipment $8,400
Notes Payable 20,000
Unearned Rent Revenue 9,900
Rent Revenue 60,000
Interest Expense .. 0 ..
Salaries & Wages Expense 14,000

An analysis of the accounts shows the following.

1. The equipment depreciates $300 per month.
2. One-third of the unearned rent revenue was recognized during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $650.
5. Insurance expires at the rate of $200 per month.

49
ACT 1600 Fundamentals of Financial Accounting

Instructions:
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional
accounts are Depreciation expense, Insurance expense, Interest Payable and Supplies Expense.

Date Account title Debit Credit

Problem 3-3:
Samanta Company purchased a new machine on October 1, 2019, at a cost of $96,000. The company
estimated that the machine will have a residual value of $12,000. The machine is expected to be used
for 10,000 working hours during its 5-year life.

Instructions:
Compute the depreciation expense under the following methods for the year indicated.
(a) Straight-line for 2019.
(b) Units-of-activity for 2019, assuming machine usage was 1,700 hours.
(c) Declining-balance using double the straight-line rate for 2019 and 2020.

a)

c)

50
ACT 1600 Fundamentals of Financial Accounting

Problem 3-4:
Tigger Company purchased a delivery truck for $36,000 on January 1, 2019. The truck has an expected
residual value of $6,000, and is expected to be driven I 00,000 miles over its estimated useful life of 8
years. Actual miles driven were 15,000 in 20I9 and I2,000 in 2020.

Instructions
(a) Compute depreciation expense for 2019 and 2020 using (I) the straight-line method, (2) the units-of-
activity method, and (3) the double-declining balance method.

(b) Assuming that Tigger uses the straight-line method. (I) Prepare thejournal entry to record 2019
depreciation. (2) Show how the truck would be reported in the December 31, 2019, statement of
financial position.

a)

1)

2)

3)

b)
1)

2)

Problem 3-5:
Prepare the adjusting entries for the following independent cases.
Every case uses one month accounting period (January). Explanations are not required.

I. On January 1, 2019, Ronald Company borrowed $40,000 and issued a 12%, long-term note
payable, which requires interest to be paid on the first of every month. Prepare the adjusting
entry on January 31, 2019.
2. On January 1, 2019, Mary Company received rental fee of $8,400 from Sper for 12 months
and credited to Unearned Rent Revenue. Prepare the adjusting on January 31, 2019 to record
the revenue earned.
3. On January 1, 2019, supplies on hand amounted to $200. During January, supplies that cost
$4,000 were purchased and debited to supplies account. At the end of January, a physical
inventory count revealed that supplies on hand amounted to $200. Prepare the adjusting
entry_ on January 31, 2019.
4. On January 1, 2019, Marble Company paid $4,800 for I5 months of insurance coverage.
Marble Company adjusts the accounts monthly. Prepare the necessary adjusting entry for
Marble Company on January 31, 2019.
5. On January 1, 2019, Nok Company gave a loan to the company president and received a
6%, $30,000, I year, note receivable. Prepare the adjusting entry on January 31, 2019, to
record the accrued interest on the note.
6. Gimji Company purchased a delivery truck at a cost of $90,000 on January 1, 2019. The

51
ACT I600 Fundamentals of Financial Accounting

truck is expected to have no salvage value at the end of its 6-year useful life. Prepare the
adjusting entry for depreciation of the delivery truck on January 3I, 20I9, by using the
double-declining balance method.
7. Goldy Company uses units-of-activity method in computing depreciation on its truck. The
truck is expected to be driven 100,000 miles. The truck was purchased on January I, 20I9,
at a cost $101,000 and is expected to have a salvage value of $10,000. The truck was driven
4,500 miles in January, 2019. Prepare the adjusting entry for depreciation on January 3I,
20I9.
8. Hongkok Company purchased delivery equipment at a cost of $60,000 on December I,
20I9. The equipment is expected to have no salvage value at the end of its 8-year useful life.
Prepare the adjusting entry for depreciation of the delivery equipment on January 3I, 2020,
by using the straight line method.

Date Account title Debit Credit

Problem 3-6:
Part A:
Rao Company purchased a new truck for $ 72,000 on October 1, 2019. The truck has an expected
salvage value of$ 12,000 and it is expected to be driven 200,000 miles over its estimated useful life of
20 years. Actual miles driven were 10,000 miles in 2019 and 24,000 miles in 2020.
Instructions:
1. Compute depreciation expense on the truck under the following 3 independent methods.
a. Straight line method for 2019.
b. Units of activity method for 2020.
c. Double declining balance method for 2020.
2. Record the journal entry for depreciation of the truck, for 2019 under straight line method.

52
ACT 1600 Fundamentals of Financial Accounting

a)

b)

c)

2.

Part B:
The following selected account balances were taken from the books of Peleso Company on December
3I, 20I9, (end of one-year accounting period).

Dr Cr
Cash $I2,000
Supplies 5,000
Prepaid insurance 6,000
Notes receivable 9,000
Unearned consulting revenue 9,000
Notes payable 3,000

The following information has been gathered at December 3I, 20I9, before preparing the financial
statements of the company:
I. Notes payable was issued on November I, 2019 for 3 months at 12% interest per year.
2. Supplies used during the year were $ 3000.
3. Insurance premium was paid on September 1, 2019 for 6 months.
4. Interest of$ 100 is accrued on the notes receivable.
5. Unearned revenue was collected in advance on December I, 20 I9 from a customer
to perform consulting services for 3 months.

I ns t rue f IOns: Record ad"IJUStmg entnes.

Date Account title Debit Credit

53
ACT 1600 Fundamentals of Financial Accounting

Problem 3-7:

Part A
Annama Company purchased a high-tech printer on January 1, 2019. The recorded cost of the printer
was $150,000. Annama Company estimates that the useful life of the printer is 7 years with a $10,000
residual value remaining at the end of that time period.

Instruction: Record the depreciation expense for the printer at the end of the first year of its use under
the following assumptions:

a) Annama uses the straight-line method of depreciation.

b) Annama uses the double-declining balance method.
c) Annama uses the units-of-activity method and estimates that the total useful life of printer is
21,000 units. Actual usage in the first year is 3,500 units.

a)

b)

c)

PartB
Hudson Taylor opened a mini golf course on January 1, 2019. During the first month of its operations,
the following transactions occurred.
a. On January 1st admission tickets worth $6,500 were sold. These tickets are valid for 3
months. At January 31, $2,000 remains unearned.
b. On January 1st Hudson purchased anti-riot insurance for 6 months for $3,600.
c. Utility expenses incurred but not paid prior to January 31 totaled$ 350.
d. Purchased $4,600 of administration supplies. On January 31, it was determined that $2,300
of supplies were on hand.

Instruction:
Prepare the adjusting entries for the above transactions on January 31, 2019.

Date Account title Debit Credit

54
ACT 1600 Fundamentals of Financial Accounting

Problem 3-8:
Firestone Corporation follows a one-year accounting period. Adjusting entries are performed on an
annual basis. The information below has been gathered at December 31, 2019.

1. On October 1, 2019, the company renewed its rental agreement paying $1,800 cash
for six months' rent in advance. Record the adjusting entry on December 31, 2019.
2. Firestone purchased $1,500 of office supplies in 2019. At year-end $400 of supplies remain on hand.
Record the adjusting entry on December 31, 2019.
3. Records show that Unearned Service Revenue has a credit balance of$9,000. The company received this
cash on September I, 2019 for 12 months for future services. Record the adjusting entry on December 31,
2019.
4. Accrued but unrecorded service fees earned at December 31, 2019 amounts to $2,200. Record the
adjusting entry on December 31, 2019.
5. On July 1, 2019, the company purchased a delivery truck at a cost of $70,000 with an expected residual
value of $10,000. The estimated useful life of the truck was 5 years and expected to be driven 100,000
miles over its useful life. The actual miles driven in 2019 were 20,000 miles. Record depreciation
expense for 2019, using the units of activity method.
6. Equipment was purchased on July 1, 2019, at a cost of$300,000. The equipment has an expected residual
value of $8,000 and an estimated useful life of 5 years. Record the depreciation expense for 2019, using
the double-declining- balance method. -
7. Using the same information as in (6) above, record the depreciation expense for 2019, if the company
was using the straight-line method.
8. Compute the book value of the above equipment at December 31, 2020, under straight-line method.

Date Account Title Debit Credit

5)

6)

7)

55
ACT 1600 Fundamentals of Financial Accounting

8)

Problem 3-9:
Alleppy Backwaters opened for business on June 1, 2019. Its trial balance before adjustment on August
31 is as follows:

Alleppy Backwaters Inc.

Trial Balance
A ugust 31 , 2019
Account Account Name Debit Credit
Number
101 Cash $19,600
126 Supplies 3,300
130 Prepaid Insurance 6,000
140 Land 25,000
143 Buildings 125,000
157 Equipment 26,000
201 Accounts Payable 6,500
208 Unearned Rent Revenue 7,400
275 Mortgage Payable 80,000
311 Share Capital-Ordinary 100,000

332 Dividends 5,000

429 Rent Revenue 80,000
622 Maintenance and Repairs Expense 3,600
726 Salaries and Wages Expense 51,000
732 Utilities Expense 9,400
$273,900 $273,900
..
The additional account names and numbers are giVen below:
No.112 Accounts Receivable, No. 144 Accumulated Depreciation-Buildings, No.158 Accumulated
Depreciation- Equipment, No.212 Salaries and Wages payable, No. 230 Interest Payable, No.631
Supplies Expense, No. 711 Depreciation Expense, No. 718 Interest Expense, and No. 722 Insurance
Expense.
Other data:
l. Insurance expires at the rate of $400 per month.
2. A count on August 31 shows $900 of supplies on hand.
3. Annual depreciation is $4,500 on buildings and $2,400 on equipment.
4. Unearned Rent Revenue of $4,100 was recognized for services performed prior to August31.
5. Salaries of $400 were unpaid at August 31.
6. Rentals of$3,700 were due from tenants at August3l. (Use Accounts Receivable)
7. The mortgage interest rate is 9% per year. The mortgage was taken on August I.
Instructions:
Journalize the adjusting entries on August 31, 2019, for the 3- month period Junel- August31.

56
ACT 1600 Fundamentals of Financial Accounting

Date Account Titles Debit Credit

*****************************

57
ACT 1600 Fundamentals of Financial Accounting

CHAPTER4
COMPLETING THE ACCOUNTING CYCLE

Objectives: After studying this chapter you should be able to:

. Prepare a worksheet
. Explain the process of closing the books
. Preparing Correction entries

I. Worksheet
To prepare accounting information and reports, accountants use a spreadsheet called work
sheet. Accounting worksheets are most often used in the accounting cycle process to show an
unadjusted trial balance, adjusting journal entries, adjusted trial balance, and financial
statements.
It is an optional tool.
Work sheet format

1 2 3 4 5
Trial Balance Adjustments Adjusted trial Income Statement of
balance statement financial
position
Account
title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

1. Prepare a 2. Enter 3. Enter 4.

trial balance adjustment adjusted Extend adjusted balances to
on the work data balances proper statement columns
sheet 5.
Total the statement columns
Compute net income (or net loss),
and complete work sheet

II. Closing entries

At the end of the accounting period, the company makes the accounts ready for the next period.
Entries made at the end of an accounting period to transfer the balances of temporary accounts,
i.e., revenues, expenses and dividend, to a permanent equity, Retained Earnings account.
Companies' closes to Income Summary (a temporary account used for closing revenues and
expenses) all accounts that affect net income. In journalizing, the company credits all temporary
accounts with debit balances, and debits all temporary accounts with credit balances.

58
ACT 1600 Fundamentals of Financial Accounting

PERMANENT
These accounts are dosed These accounts are not closed

Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss)
and dividends to Retained Earnings.

Closing Journal entries

• Close revenue accounts

Dr. Revenues ............... XXX

Cr. Income summary .......... XXX

• Close expense Accounts "

Dr Income summary ........... XXX

Cr. Expenses ........... XXX

• Close Income summary account to retained earnings ( net income)

Dr Income summary .................. XXX

Cr. Retained earnings ............ XXX

• Close Income Summary account to retained earnings ( net loss)

Dr Retained earnings ............... XXX

Cr. Income summary ........ XXX

• Close Dividend account

Dr Retained earnings ............ XXX
Cr. Dividend ................. XXX

Note: Dividends are closed directly to Retained Earnings and not to Income
Summary because Dividends are not an expense.

EXAMPLE OF CLOSING ENTRIES FOR SERVICE TYPE BUSINESS:

Close Income statement accounts with credit balance (Revenues):

Dec. 31: Service Revenue 200,000
Income Summary 200,000

Close Income statement accounts with debit balance (Expenses):

Income Summary 30,000
Salaries Expense 8,000
Utilities Expense 900
Repair Expense 1,900
Gas &Oil Expense 7,200
Insurance Expense 3,500
Depreciation Expense-Building 6,000
Depreciation Expense-Equipment 2,000
Interest Expense 500

59
ACT 1600 Fundamentals of Financial Accounting

Close Income Summary account (Net Income)

Income Summary 170,000
Retained earnings 170,000

Close Dividends:
Retained earnings 1,000
Dividends 1,000

III.Correction Entries
The accountants wiii prepare correcting entries when they find errors in their recordings. Since
recordings have already been posted to the accounts, they cannot be corrected by using eraser or liquid
paper. In accounting, errors cannot be corrected without clue or evidence. So, we have to prepare
correcting entries to correct our errors.

Example 1: Purchase of supplies on account 490 Baht has been recorded as debit Supplies 490 Baht
and credit Cash 490 Baht

Wrong entry Correct entry Correction entry

Supplies 490 Supplies 490 Cash 490
Cash 490 Accounts payable 490 Accounts Payable 490

Example 2: Purchase of supplies on account 490 Baht has been recorded as debit Supplies 390 Baht,
and credit Accounts Payable 390 Baht.

Wrong entrv Correct entry Correction entry

Supplies 390 Supplies 490 Supplies 100
Accounts payable 390 Accounts payable 490 Accounts Payable 100

Example 3: Purchase of supplies on account, 490 Baht, has been recorded as debit Equipment 490 Baht
and credit Accounts Payable 490 Baht.

Wrong entry Correct entry Correction entry

Equipment 490 Supplies 490 Supplies 490
Accounts payable 490 Accounts payable 490 Equipment 490

Example 4: Purchase of supplies on account 490 Baht has been recorded as debit Equipment 390 Baht
and credit Accounts Payable 390.

Wrong entry Correct entry Correction entry

Equipment 390 Supplies 490 Supplies 490
Accounts payable 390 Accounts payable 490 Equipment 390
Accounts Payable 100

60
ACT 1600 Fundamentals of Financial Accounting

Problems

Problem 4-1:
1. A collection of$ 1,000 from a client on account was debited to Cash $700 and credited to
Service Revenue $700. Record the correction entry.
2. A payment of $3,000 cash dividend was debited to Salaries and Wages Expense $3,000 and
credited to Cash $3,000. Record the correction entry.
3. A collection of $1,000 from a client (Mr.Chen) on account was debited to cash and credited to
accounts receivable $2,000. Prepare the correcting entry.
4. Discovered an error in recording of payment of utility expense. Payment of$107 was recorded as
$170. Record correction entry.
5. Collection of cash $4,500 from a credit customer was mistakenly credited to accounts payable
account. Record correction entry.
6. A payment of Salaries and Wages Expense of $1,200 was debited to Utilities Expense and
credited to Cash both for $1,200. Record the correction entry.
7. The purchase of equipment on account for $760 was debited to Equipment $670 and credited to
Accounts Payable $670

1.
"

2.

3.

4.

5.

6.

7.

61
ACT 1600 Fundamentals of Financial Accounting

Problem 4-2:
Herald Agency began operations as a private investigator on January 1, 2019. The trial balance
columns of the worksheet for Herald Agency at March 31 are as follows.

Herald Agency, P.I., Inc.

Worksheet
For the Quarter Ended March 31, 2019
Trial Balance

Account Titles Cr.

Cash $11,410
Accounts Receivable 5,920
Supplies 1,250
Prepaid Insurance 2,400
Equipment 30,000
Notes Payable $10,000
Accounts Payable 12,350
Share Capital -Ordinary 20,000
Dividends 600
Service Revenue 14,200
Salaries and Wages Expense 2,240
Travel Expense 1,300
Rent Expense 1,200
Miscellaneous Expense
$56.550

Other data:
1. Supplies on hand total $480.
2. Depreciation is $720 per quarter.
3. Interest accrued on 6-month note payable, issued January 1, $300.
4. Insurance expires at the rate of $200 per month.
5. Service provided but unbilled at March 31 total $1,080.

Instructions:

(a) Partial worksheet is given below. Complete the worksheet.

(b) Prepare an income statement and a retained earnings statement for the quarter and a classified
statement of financial position at March 31.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.

62
ACT 1600 Fundamentals of Financial Accounting

Herald Agency, P.I., INC.

Worksheet
For the Quarter Ended March 31,2019
(a)
Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Statement of Financial
Position
Account titles
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Dr. Cr.
Cash _______
___
__
! Prepaid Insurance _________ _____ ],_100_
___________ ____ __ 1-------
________________ -- $10,000 ········--·
_________________ _ 12,350 I I l I I I
Share Capital-Ordinary 20,000
Dividends
--·---·-----"'-····--·---·------------..·..-···---··-·--··------
I 600
Service Revenue 14,200 1------1-----------1
___ __ _ __
Travel Expense ____
' Rent Ex ense ____1_,200 l-----l-------l-----1--·-----------------------ll-------r-----J-------------··--···-----+----······----·-········-------------1
,_l.::fiscellaneous ___ __23_0_
Totals $56.550 $56.550

1-----

63
ACT 1600 Fundamentals of Financial Accounting

b) Income statement

Retained earnings statement

Statement of Financial Position

64
ACT 1600 Fundamentals of Financial Accounting

c) Adjusting entries
Date Account title Debit Credit

"'

d) Closing entries

65
ACT 1600 Fundamentals of Financial Accounting

Problem 4-3: The trial balance columns of the worksheet for Nero lax Roofing at March 31, 2019, are
as follows.

Nerolax Roofing
Trial Balance
For the Month Ended March 31,2019

Account Titles .J.!!::_ Cr.

Cash $2,720
Accounts Receivable 2,700
Supplies 1,500
Equipment 11,000
Accumulated Depreciation - Equipment $1,250
Accounts Payable 2,500
Unearned Service Revenue 550
Share Capital Ordinary 10,000
Dividends 1,100
Service Revenue 6,300
Salaries and Wages Expense 1,300
Miscellaneous Expense _ml
$20.600

Other data:
1. A physical count reveals only $550 of roofing supplies on hand.
2. Depreciation for March is $250.
3. Unearned revenue amounted to $290 at March 31.
4. Accrued salaries are $480.

Instructions:
(a) Partial worksheet is given below. Complete the worksheet.
(b) Prepare an income statement and a retained earnings statement for the month of March and a
classified statement of Financial Position at March 31.
(c) Journalize the adjusting entries from the adjustment columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet

66
ACT 1600 Fundamentals of Financial Accounting

Nerolax Roofing
WorkSheet
For the month ended March 31, 2019

(a)
Trial Balance Adjustments Adjusted Trial Balance Income Statement Statement of Financial
Account titles Position
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash $2,720
Accounts Receivable 2,700
Supplies 1,500
Equipment 11,000
Ace. Depreciation-Equipment $1,250
Accounts Payable 2,500
Unearned Service Revenue 550
Share Capital Ordinary 10,000
Dividends 1,100
Service Revenue 6,300
Salaries and Wages Expense 1,300
Miscellaneous Expense 280
Totals $20,600 $20,600
'
'

67
ACT 1600 Fundamentals of Financial Accounting

b) Income statement

Retamed earnmgs statement

Statement of Financial Position

68
ACT 1600 Fundamentals of Financial Accounting

c)Ad"
I.JUS f mg en t"
nes
Date Account title Debit Credit

d) Closing entries

*****************************************

69
ACT 1600 Fundamentals of Financial Accounting

CHAPTERS
ACCOUNTING FOR MERCHANDISING OPERATIONS
Objectives: After studying this chapter, you should be able to:

o Identify the differences between service and merchandising companies

o Explain the recording of purchases under a perpetual inventory system and periodic inventory
system.
o Explain the recording of sales revenue under perpetual inventory system and periodic inventory
system
o Explain the steps in accounting cycle for a merchandising company.
• Preparing work sheet for a merchandiser.
• Prepare Income statement, Retained earnings statement and Statement of financial position for a
merchandiser.

Merchandising Companies are those businesses who buy and sell merchandise (goods I products) for
their primary source of revenue.
>- Merchandising Companies that purchase and sell directly to consumers are called retailers.
>- Merchandising Companies that sell to retailers are called wholesalers.
The primary source of revenue is by selling merchandise, often referred to as sales revenue or sales.
• The two main expenses for a merchandiser are:
•!• Cost of goods sold
•!• Operating expenses.
• The added asset account for a merchandising company is the Inventory account.

The accounting for inventory depends on which method the company is using:

Perpetual Inventory system or Periodic inventory system

Perpetual inventory system Periodic inventory_ system

• Companies keep detailed records of cost of • No detailed inventory records of the
each inventory purchase and sale. goods on hand throughout the period are
• These records continuously-perpetually- kept.
show the inventory that should be on hand • The cost of goods sold is determined only
for every item. at the end of the accounting period.
• A company determines the cost of goods • Calculating Cost of goods sold:
sold each time a sale occurs. Beginning inventory $100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $775,QQQ

Few Terms in Merchandising Business.

Discount
o Purchase Discounts
Credit terms may permit buyer to claim a cash discount for prompt payment.
Example: Credit terms of 3/15, n/30, is read "three-fifteen, net thirty." 3% cash discount if
payment is made within 15 days.
• Sales Discount
• Offered to customers to promote prompt payment.
• "Flipside" of purchase discount.
• Contra-revenue account (debit).
Freight terms
FOB shipping point
Seller places goods Free on Board the carrier, and buyer must pay to get the goods delivered
i.e.: buyer pays freight costs.
FOB destination
Legal title of the goods remain with the seller until the goods reach the buyers location.

70
 ACT 1600 Fundamentals of Financial Accounting

Seller places goods Free on Board to the buyer's place of business, and seller pays freight costs.

JOURNAL ENTRIES

Transactions Perpetual inventory system Periodic Inventory system

Journal entries for the Buyer
!.Purchased merchandise Inventory ......................... xx Purchase ................ XX
Cash/ Accounts Payable ... XX Cash/ Accounts Payable ..... XX
2.Return of merchandise Cash/Accounts payable ........ xx Cash/Accounts payable ...... xx
purchased Inventory ............... XX Purchase return and
Allowance ............... XX
3.Paid freight cost (FOB Inventory ........................ XX Freight-in/Transportation -in .. xx
Shipping Point) Cash ........................ XX Cash .................. XX

4. Payment during the Accounts Payable ............ XX Accounts Payable ............ XX

discount period Cash ....................... XX Cash ........................... XX
Inventory ................. XX Purchase discount ........... XX
Journal entries for the Seller
1. Sale of merchandise Accounts Receivable/ Cash ..... xx Accounts Receivable/ Cash ... xx
Sales revenue ................. XX Sales revenue ............... XX

Cost of goods sold .............. XX

Invent01y ................... XX
2. Customer returns Sales return & Allowance ....... XX Sales return & Allowance .... xx
merchandise sold Accounts receivable I Cash ...... XX AIR I Cash .................. XX

Invent01y .......................... XX
Cost of goods sold ........... XX
3. Paid freight (FOB Freight-out/Delivery expense ... XX Freight-out/Delivery expense ... xx
Destination) Cash ............................... XX Cash .............................. XX
4. Collected cash during Cash ................................ XX Cash ................................ xx
the discount period Sales discount .................... XX Sales discount.. .................. xx
Accounts receivable ....... XX Accounts receivable ....... XX

Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are damaged or defective, or of inferior quality, or do not
meet specifications.
• Purchase Return
Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was
for cash.
• Purchase Allowance
May choose to keep the merchandise if the seller will grant an allowance (deduction) from the
purchase price.

Sales Returns and Allowances

Ql "Flipside" of purchase reh1rns and allowances.

Ql Contra-revenue account (debit).

71
ACT 1600 Fundamentals of Financial Accounting

Financial Statements for a merchandising business. (Under perpetual Inventory system)

1.

Sales revenue:
Sales 480,000
Less: Sales. . returns and allowance . U,QQQ ___
Sales discount 8,000 20,000
Net . 4§0,QQQ . .
. (::Qs_(() (gQo_<Js <1 .... 316.000
...... P!:c:Jti( 144,000

. _Operating expenses:* _. .
... . . .. 64,000 ....
______ _________________________________________________________ JZ,QQQ______________________
. ................... 1§,QQQ ..
. . .....
.. ...... . ·- . . ?,QOQ
2,000
......... 114,000
___

Interest revenue 3,000

.. Qll:i!l c:J.Il 600
.ll:.lUlltR§§K§i.i:.':._________________________________--,-_ __
[,()SS()ndispos_al (200)
t ... (1,800)
(2,000) 1,600
$31,600

Note: * Expenses incurred in the process of earning sales revenue

** Expenses that occur outside of a company's day to day activities and it is
recorded immediately after company's primary operating activities. Other income
and expense consists of various revenues and gains and expenses and losses that are
unrelated to the company's main line of operations.

2. Name of business
Retained Earnings Statement
For the year/ quarter/ month ended ..........

Retained earnings, beginning balance xxxx

Add: Net income/ (Less. if net loss) XXX
xxxx
Less: Dividend XXX
Retained earnings, ending balance xxxx

72
ACT 1600 Fundamentals of Financial Accounting

FORMAT OF STATEMENT OF FINANCIAL POSITION

ABAC Company
Statement of Financial Position
December 31, 20xx

ASSETS
Current Assets:
Cash $9,000
Marketable securities 200
Accounts receivable 4,800
Notes receivable 5,000
Inventory 200
Supplies 1,800
Prepaid expense 1,400
Total Current Assets 22,400

Non-Current Assets:
Property, Plant and Equipment:
Land $11,500
Building 15,000
Less: Accumulated Depreciation-Building 1,000 14,000

Equipment 7,500
Less: Accumulated Depreciation-Equipment 500 7,000
Total Property Plant and Equipment $32,500

Intangible Assets ... 0 ...

Total Non-current assets $32,500

Total Assets $54.900

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current Liabilities:
Notes payable 4,000
Accounts Payable 3,000
Interest Payable 500
Salaries and Wages Payable 800
Unearned Revenue 1,000
Total Current Liabilities 9,300

Non-current Liabilities:
Mortgage Payable 12,000
Bank Loan 7,000
Bonds payable 3,000
Total Non-current liabilities
Total Liabilities 31,300

Shareholders' Equity:
Share Capital-Ordinary shares $15,000
Retained Earnings 8,600
Total Shareholder's Equity 23,600
Total Liabilities and Shareholders' Equity $54.900

73
ACT 1600 Fundamentals of Financial Accounting

Adjusting entry for adjustment of Inventory account:

• A merchandising company generally has the same adjusting entries as a service company.
• A merchandising company that uses perpetual inventory system will require one additional
adjustment to make the records agree with the actual inventory on hand.
• The perpetual inventory records may be incorrect due to recording errors, theft or waste.
• Thus, the company need to adjust the perpetual records to make the recorded inventory amount
agree with the inventory on hand. This involves adjusting the inventory and cost of goods sold.
The adjusting entry is:

XXX
XXX

Closing entries
> At the end of the accounting period, the company makes the accounts ready for the next period.
> Merchandising companies closes to Income Summary (a temporary account used for closing
purposes) all accounts that affect net income. In journalizing, the company credits all temporary
accounts with debit balances, and debits all temporary accounts with credit balances.

PERMANENT
These accounts ar·e not closed

> Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss)
and dividends to Retained Earnings.

Cl osmg
. J ourna en nes
• Close revenue accounts

Dr. Revenues ........................ XXX

Cr. Income Summary XXX
... Close expense Accounts

Dr Income Summary ............... XXX

Cr. Expenses .............. XXX
II
Close Income summarY account to retained earnings ( net
income)

Dr Income Summary ................... XXX

Cr. Retained Earnings ....... XXX
• Close Income SummarY account to retained earnings ( net
loss)

Dr Retained Earnings ................... XXX

Cr. Income Summary ......... XXX
• Close Dividend account
Dr. Retained Earnings ................... XXX
Cr. Dividend .................... XXX

Note: Dividends are closed directly to Retained Earnings

and not to Income Summary because Dividends are not an
expense.

74
ACT 1600 Fundamentals of Financial Accounting

Problems

Problem 5-1:

The following transactions were completed during April, 20XX for William Sports Shop.
April 4 Purchased cricket bat and balls from Heidi Co. $ 860, terms 3/10, n/30, FOB Shipping
point.
6 Paid freight on Heidi Co. purchase $74.
8 Sold merchandise to customers $900, terms n/30.
10 Received credit of$60 from Heidi Co. for a cricket bat that was returned.
11 Purchased sports shoes from Velky Sports for cash $300.
13 Paid Heidi Co. in full.
14 Purchased sports shirts and shorts from Lizen Sportswear $700, terms 2/10, n/60.
15 Received cash refund of $50 from Velky Sports for damaged merchandise that was
returned.
17 Paid freight on Lizen Sportswear purchase $30.
18 Sold merchandise to customers $1,200, terms n/30.
20 Received $500 in cash from customers in settlement of their accounts.
21 Paid Lizen Sportswear in full.
27 Granted an allowance of $25 to customers for sports clothing that did not fit properly.
30 Received cash payments on account from customers $620.

Instruction:
Journalize the April transactions for William Sports Shop using a periodic inventory system.

Journal entries
Date Account Title Debit Credit

75
ACT 1600 Fundamentals of Financial Accounting

Problem 5-2:

The following transactions were completed during March, 20XX for Serina Golf Shop.
March 4 Purchased golf bags, clubs, and balls from Bala Co. $1,300 , terms 2110, n/60, FOB
Shipping point.
6 Paid freight on Bala Co. purchase $70.
9 Received credit of$ l 00 from Bala Co. for merchandise that was returned.
l 0 Sold merchandise to customers $670, terms n/30.
12 Purchased golf shoes and sweaters from Axis Sports $450, terms 1110, n/30.
14 Paid Bala Co. in full.
17 Received credit from Axis Sports for merchandise returned $50.
20 Sold merchandise to customers $600, tenns n/30.
21 Paid Axis Sports in fhll.
27 Granted credit to customers for sweaters that had got damaged $55.
30 Received $630 in cash from customers in settlement of their accounts.

Instruction:
Journalize the March transactions for Serina Golf Shop using a periodic inventory system.

Journal entries
Date Account title Debit Credit

76
ACT 1600 Fundamentals of Financial Accounting

Problem 5-3:
The information related to Change Co. is presented below. Change Co. uses a periodic inventory system.

AprilS Purchased merchandise from Boy Company for $6,000, terms 5/10, net/30, FOB shipping
point.
April6 Purchased equipment (for business operation) from Saijo Denko on account for $7,000,
terms 2/10, net/30, FOB shipping point.
April7 Paid transportation cost $500 for the equipment purchased from Saijo Denko.
AprilS Paid the amount due to Boy Company in full.
Ap_rillO Sold merchandise to Hot Co. for $9,000, offering terms of2/10, n/30.
April15 Paid transportation cost $180 for the merchandise purchased from Boy Company.
April30 Collected cash from Hot Co.

Instruction: Prepare the journal entries to record the transactions in the books of Change Co.
Explanations are not required.

Journal entries
Date Account title Debit Credit

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ACT 1600 Fundamentals of Financial Accounting

Problem 5-4:
Natalie distributes books to retail stores and extends credit terms of2/10, n/30 to all of its customers. At
the end of May, Natalie's inventory consisted of books purchased for €1,800. During June the following
transactions occurred.
June 1 Purchased books on account for €1,850 from Philip Publishers, FOB destination, terms
2/10, n/30. The appropriate party also made a cash payment of €50 for the freight on this
date.
3 Sold books on account to Ester for €2,500. The cost of goods sold was €1,440.
6 Received €150 credit for books returned to Philip Publishers.
9 Paid Philip Publishers in full.
15 Received payment in full from Ester.
17 Sold books on account to Bunker Readers for €1,800. The cost of books sold was €1,020.
20 Purchased books on account for €1,500 from DC Publishers, FOB destination, terms
2115, n/30. The appropriate party also made a cash payment of €50 for the freight on this
date.
24 Received payment in full from Bunker Readers.
26 Paid DC Publishers in full.
28 Sold books on account to Cozy Corner for €1,300. The cost of the books sold was € 850.
30 Granted Cozy Corner credit of€120 for books returned, costing €72.

Instruction:
Journalize the transactions for the month of June for Natalie Warehouse using a perpetual inventory
system.
Journal entries
Date Account Title Debit Credit

78
ACT 1600 Fundamentals of Financial Accounting

Problem 5-5:
Sissy Supply is a wholesaler dealing in sports bags. On September l, Sissy Supply had an inventory of
15 sports bags at a cost of$200 each. During September, the following transactions and events occurred.
Sept. 4 Purchased 80 sports bags at $200 each from Mabel, terms 2/10, n/30, FOB destination.
Sept. 6 Received credit of $1200 for the return of 6 sports bags purchased on September 4 that were
defective.
Sept. 9 Sold 40 sports bags for $250 each to Oliver Co, terms 2/10, n/30, FOB Destination.
Sept. 10 Paid $500 freight on September 9 sales.
Sept. 13 Granted Oliver Co $1,250 credit for 5 sports bags that were returned due to damage.
Sept. 14 Paid Mabel in full for September 4 purchase.
Sept. 20 Received payment in full from Oliver Co.
Sept. 25 Purchased 10 sports bags for cash at a cost of $250 each.
Sept. 26 Received refund of $500 from supplier of Sept. 25, for 2 sports bags that were damaged.

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ACT 1600 Fundamentals of Financial Accounting

Instructions:
Journalize the September transactions for Sissy Supply using perpetual inventory system.
(Explanations not required).

Date Account Titles Debit Credit

Problem 5-6:
Himalaya Company is a whole sale dealer of a special brand of bicycles. The company estimated that
the cost of bicycles they keep for sale is $80 each. The sale of bicycles to all customers is on terms 2/10,
n/30, and FOB shipping point. On SeptemberlO, 20XX, Himalaya Company sold 200 bicycles to
Everest Company at $100 each, the appropriate party paid $1,500 for freight charges.
On September 12, 20XX, Everest Company returned 10 bicycles to Himalaya Company as they were
badly damaged during transit.
On September 18, Himalaya Company collected cash from Everest Company on its accounts receivable
balance.

Instructions:
a. Record journal entries on the above transactions in the books of Himalaya Company assuming
that the company follows perpetual inventory system to record its merchandise transactions.
b. Assuming that Everest Company follows periodic inventory system, record the journal entries
on its transactions with Himalaya Company.

a) Journal entries for Himalaya Company

___,____C
__

80
ACT 1600 Fundamentals of Financial Accounting

"',

b) J ourna ent nes

. fior Everes tC ompany

Date Account title Debit Credit

Problem 5-7:
The trial balance of Cas in ova Company at December 31, 20XX, the end of the company's fiscal year is
shown on the worksheet:
The following adjustment data is provided:
1. Supplies on hand totaled $3,500.
2. Depreciation is $9,000 on the equipment.
3. Interest of$4,080 is accrued on notes payable at December 31.
4. Inventory on December 31 is $44,400.

Instructions:
1. Complete the worksheet.
2. Prepare a multiple-step income statement and a statement of financial position.
3. Journalize the closing entries

81
ACT 1600 Fundamentals ofFinancial Accounting
Casinova Company
Work sheet
For the vear ended December 31. 20XX
Trial balance Adjustments Adjusted Trial balance Income Statement ST: of Financial
Position
Account Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash $51,700
Accounts Receivable 30,700
Inventory 44,700
Supplies 6,200
Equipment 85,000
Accumulated Depreciation- Equip $18,000
Notes Payable 51,000
Accounts Payable 48,200
Share Capital-Ordinary 80,000
Retained Earnings 55,000
Dividends 12,000
Sales Revenue 717,500
Sales Returns & Allowances 6,800
Sales Discounts 2,000
Cost of goods sold 497,400
Salaries expense 140,000
Advertising expense 26,400
Utilities expense 14,000
Repair expense 12,100
Delivery expense 16,700
Rent expense 24,000
Total $969,700 $969,700

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 ACT 1600 Fundamentals of Financial Accounting

2. Multiple-Step Income Statement

Casinova Company
·····---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Multiple-Step Income Statement
--------------···-··--------····--------------------------···-----------···---------------------------·-------------·-··----------------------------------------···----------------------------------------·---------------
For the year ended December 31, 20XX

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ACT 1600 Fundamentals ofFinancial Accounting

Statement of Financial Position

Casinova Company
Statement of Financial Position
----------- .. ·------------. ··------------ ------------ ... ----------- .. ----------- .. ·-----------------------------------------··---------------------------· ----------- .. ---------------------------. ··-
December 31, 20XX

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ACT 1600 Fundamentals of Financial Accounting

3. Closing Entries.

Problem 5-8:
The trial balance of Miranda Company at December 31, 20XX, the end of the company's fiscal
year is shown on the work sheet:
Adjustment data:
1. Depreciation is $10,000 on buildings and $9,000 on equipment.
2. Interest of $5,000 is due and unpaid on notes payable at December 31.
3. Inventory on December 31 is $88,900.

Instructions:
I. Complete the Worksheet.
2. Prepare a multiple-step income statement, and a statement of financial position at
December31, 20XX.
3. Journalize the closing entries.

85
ACT 1600 Fundamentals of Financial Accounting
MIRANDA COMPANY
WorkSheet
For the year ended Dec 31, 20XX

Account Title Trial Balance Ad.iustments Ad.i: Trial Balance Income Statement St of Financial Position
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash $25 400
Accounts Receivable 37,600
Inventory 90,000
Land 92,000
Building 197,000
Accumulated Dep-Building $54,000
Equipment 83,500
Accumulated Dep-Equipment 42,400
Notes Payable 50,000
Accounts Payable 37,900
Share Cal!itai-Ordinary 200,000
Retained Earnings 68,900
Dividends 10,000
Sales Revenue 904,100
Sales Returns & Allowances 2,000
Sales Discount 4,100
Cost of goods sold 709,900
Freight-out 2,000
Salaries Expense 67,800
Utilities Expense 19,400
Repair Ex_p_ense 5,900
Gas & oil Expense 7,200
Insurance Expense 3,500
Total $1,357,300 $1,357,300
'

86
 ACT 1600 Fundamentals of Financial Accounting

2. Multiple-Step Income Statement

Miranda Company
Multiple-Step Income Statement
·-----··------------------------------------------------------···------------····-----------···----------------------------------------------------------------------------------··------------------------------------
For the year ended December 31, 20XX

87
ACT 1600 Fundamentals ofFinancial Accounting

Statement of Financial Position

Miranda Company
Statement of Financial Position
December 31, 20XX

88
ACT 1600 Fundamentals of Financial Accounting

3. Closing Entries.

Problem 5-9:
The unadjusted trial balance of Revathy Trading Company is provided in the answer sheet. The
Company follows a six- months accounting period, July 1 to December 31. At the end of the accounting
period, December 31, 20XX, the following adjusting information is gathered:
1. Insurance expired during the accounting period is $1,500.
2. Depreciation on the truck for the accounting period is $250.
3. Annual depreciation on the equipment is $6,000.
4. Rent revenue earned during the accounting period is $500.
5. Accrued interest on note payable due on December 31 is $250.
6. Inventory at December 31 is $45,000.

Instructions:
1. Make adjustments and complete the worksheet provided in the answer sheet.
2. Prepare a multiple step income statement for the accounting period.
3. Prepare a statement of financial position as on December 31, 20XX.

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 ACT 1600 Fundamentals of Financial Accounting

Revathy Trading Company

Partial Work Sheet
For the 6 months ended Dec 31, 20XX
Trial balance Adjustments Adjusted Trial
balance
Account Title Dr Cr Dr Cr Dr Cr
Cash $23,500 $23,500
Inventory 50,000
Prepaid Insurance 2,000
Truck 20,000 20,000
Accumulated depreciation-Truck 0
Equipment 60,000 60,000
Accumulated depreciation- Equipment $10,000
Note payable 5,750 5,750
Unearned rent revenue 1,500
Share capital- Ordinary 127,000 127,000
Retained earning 6,000 6,000
Dividends 1,000 1,000
Sales 201,000 201,000
Sales returns and allowances 11,000 11,000
Cost of goods sold 180,000
Salaries expense 3,750
Total $351,250 $351,250

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 ACT 1600 Fundamentals ofFinancial Accounting

2. Multiple-Step Income Statement

Revathy Trading Company

Multiple-Step Income Statement
For 6 months ended December 31, 20XX

-------------------------------------------------------------------------------- ------------ --------------------------------·---------------!::-....................... ------·······-----------------------------------·

91
ACT 1600 Fundamentals of Financial Accounting

3. Statement of Financial Position

Revathy Trading Company

Statement of Financial Position
December 31, 20XX

92
ACT 1600 Fundamentals of Financial Accounting

Problem 5-10:
The trial balance of Kosio Company at December 31, 20XX, the end of the company's fiscal year is
shown on the worksheet:
Adjustment data:
I. Supplies on hand total $2,500.
2. Depreciation is $7,000 on buildings and $3,000 on equipment.
3. Interest of$2,000 is due and unpaid on notes payable at December 31.
4. Inventory on December 31 is $22,000.
Instructions:
1. Complete the worksheet.
2. Prepare multiple-step income statement for the period ended December 31, 20XX.
3. Prepare a classified statement of financial position as of December 31, 20XX.

Kosio Company
Worksheet (Partial)
For the Year Ended December 31, 20XX
Account Title Trial Balance Adjustments Adjusted Trial
Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash $97,500
Accounts Receivable 35,200
Inventory 22,500
Supplies 9,000
Land 90,000
Buildings 120,000
Accumulated Depreciation - $18,000
Buildings
Equipment 80,000
Accumulated Depreciation- 16,000
Equipment
Notes Payable 25,000
Accounts Payable 18,000
Share Capital- Ordinary 250,000
Retained Earnings 110,000
Dividends 5,000
Sales Revenue 156,000
Sales Return & Allowances 10,000
Sales Discount 6,000
Cost of Goods Sold 89,500
Freight-out 2,500
Salaries and Wages Expense 11,000
Advertising Expense 6,000
Rent Expense 7,000
Utilities Expense 1,800
Total $523.000 $523!000

93
ACT 1600 Fundamentals of Financial Accounting

2. Multiple-Step Income Statement

Kosio Company
Multiple -Step Income Statement
For the year ended December 31, 20XX

94
ACT 1600 Fundamentals of Financial Accounting

3. Statement of Financial Position

Kosio Company
Statement of Financial Position
December 31, 20XX

*********************************

95
ACT 1600 Fundamentals ofFinancial Accounting

CHAPTER6
INVENTORIES
Objectives: After studying this chapter, you should be able to:
• Describe the steps in determining inventory quantities.
• Explain the accounting for inventories and apply the inventory cost flow methods.
• Explain the lower-of-cost -or-net realizable value basis of accounting for inventories

I. Classifying Inventory
A company classifies its inventory depending on whether the firm is a merchandiser or
manufacturer.
For a merchandising company Inventory has two common characteristics
+ They are owned by the company
+ They are in a form ready for sale to customers.

II. Determining inventory quantities

At the statement of financial position date, companies must determine
• How many units are on hand, and value those units.

Two steps are required to achieve this:

o Take a physical inventory count
o Determine ownership of goods

>- Physical Inventory taken for two reasons:

Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft).
Periodic System
1. Detennine the inventory on hand
2. Detennine the cost of goods sold for the period.

Taking a Physical Inventory

" Involves counting, weighing, or measuring each kind of inventory on hand.
Taken,
+ when the business is closed or business is slow.
+
at end of the accounting period.
>- Determining Ownership of Goods
Goods in Transit
+
Purchased goods but not yet received.
+
Sold goods but not yet delivered.
{Goods in transit should be included in the inventory of the company that has legal title to the
goods. Legal title is determined by the terms of sale.}

Ownership of the goods passes to the buyer when

FOB shipping
the public carrier accepts the goods from the seller
point

Ownership of the goods remains with the seller

FOB
until the goods reach the buyer.
destination

96
ACT 1600 Fundamentals of Financial Accounting

III. Periodic Inventory System:

Computation of ending inventory in units
(Cost of goods
available for sale)
or
Date Details Units Unit cost Total cost
Beginning inv XX $XX XX
Purchase XX $XX XX
Purchase returns (xx) $(xx) (xx)
Purchase XX $XX XX
Total units available for sale XX XX
Less: Total units sold (xx)
Ending inventory in units XX

There are two assumed cost flow methods:

1. First-in, first-out (FIFO)
2. Average-cost
(Note: Cost flow does not need to be consistent with the physical movement of the goods.)
FIRST-IN, FIRST-OUT (FIFO)
• Earliest goods purchased are the first to be sold.
• Cost of earliest goods purchased are the first to be recognized as cost of goods sold.
e .Ending inventory consists of items purchased late in the year.
Illustration: Data for Kait Electronics' Condensers.

Kait Electronics
Date Explanation Units Unit Cost Total Cost
Jan 1 Beginning inventory 10 $ 100 $ 1,000
Apr 15 Purchase 20 110 2,200
Aug24 Purchase 30 120 3,600
Nov27 Purchase 40 130 5,200
Total units available for sale 100 $12 000
Units sold 55
Units in ending invento_ry 45

Solution:

Date Explanation Units Unit Cost Total Cost

Jan. Beginning 10 HK$100 HKS 1,000
Apr. 15 Purchase 20 110 2,200
Aug. 24 30 120 3,600
Nov. 27 Purchns0 40 130 5,200
Toto I 100

Unit Total
Date Units Cost Cost
Nov. 27 40 HK$130 Cost of goods ;wuilablc for sule HK$12.000
Aug:. 24 J 120 Less: Ending invenl.or.v 5,800
1hi;ll 45 Cost of goods soltl HK$ 6,200
=
AVERAGE COST
• Goods available for sale are homogeneous.
e Cost of goods available for sale is allocated on the basis of the weighted average unit
cost incurred.
e The weighted average unit cost is applied to the units on hand to determine the cost of
ending inventory.

Formula to find cost of ending inventory under Average cost method

•!• Cost of goods available for sale x ending inventory in units
Total units available for sale

97
ACT 1600 Fundamentals of Financial Accounting

Date Explanation Units Unit Cost Total Cost

Jan. Beginning inventory 10 HKSIOO 1,000
Ape IS Pmchase 20 110 2,200
Aug. 24 30 120 3,600
,.,
Nov. _,
Purchase
Purchase 40 130 5,200
Total 100 HK$12,000

HK$12,000 1.00 HK$120 Cos! of goods available for sale HK$12,000

Unit Total Less: Ending inwntorv 5,400
Units Cost Cost Cosl of goCJds sold HKS 6,600
45 HK$120 HK$5,400

Additional Formulas
• Cost of goods sold
Cost of goods available for sale - Cost of ending inventory
• Gross profit= Net sales- Cost of goods sold
• Net sales = Sales - Sales rehlrn and allowances
• Gross profit rate = (Gross profit I Net sales) x 100

IV. Perpetual Inventory System- FIFO

Companies using perpehlal inventory system need to prepare an inventory stock card.

Inventor Stock Card

Date Purchase Cost of goods sold Balance

Examp:e:
Kait Electronics
Date Explanation Units Unit Cost
Jan 1 Beginning inventory 10 $ 100
Apr 15 Purchase 20 110
Aug24 Purchase 30 120
Sept.10 Sales 55 -
Nov27 Purchase 40 130

Compute Cost of Goods Sold and Ending Inventory under FIFO

98
ACT 1600 Fundamentals of Financial Accounting

Solution
Cost of Balance
Date Purchases Goods Sold (in units and cost)
January I (10 Cii• HK$100) HK$1.000
April 15 (20 @ HK$11 0) HK$2.200 (10 Ci.i• HK$100)} HK$3 200
(20CiHIK$110) . '
August 24 (30 @1 HK$120) HK$3,600 (I 0@ HK$1 00))
(20@ HK$11 O) HK$ 6,800
(30 f[!' HK$120)
September 10 (10@ HK$100)
(20 ({.il HK$11 0)
(25@ I-IK$120) (5@ HK$120) HK$ 600
HK$6,200 - - - - - - - - - - - - - - 1
November 27 (40 (ii.'I-IK$130) HK$5,200 A (5@ HK$120)}. ,

Cost of goods sold I c:__

1 Costof I
L.-..-------' l !
l
ending
inventory
l
.
Lower-of-Cost-or-Net Realizable Value
•!• Sometimes a business may hold inventory without knowing if or when it will sell due to reasons
like obsolescence, defects, over supply, major price declines etc. These causes uncertainty about
the inventory's conversion into cash. Therefore, accountants evaluate inventory and employ
lower of cost or net realizable value considerations.
•!• If inventory is carried on the accounting records to greater than its net realizable value a write-
down from the recorded cost to the lower would be made.
•!• When the value of inventory is lower than its cost
eCompanies can "write down" the inventory to its net realizable value in the period in
which the price decline occurs.
eIn the context of inventory, net realizable value is the expected selling price in the
ordinary course of business minus any costs of completion, disposal, and transportation

Illustration: Assume that TCR TV has the following lines of merchandise with costs and
market values as indicated.
Net rtealizable Lower-of-Cost-or-
Cost Value Net Realizable Value
Flatscreen TVs $60.000 $55,000 $ 55.000
Satellite radios 45.000 52,000 45.000
DVD recorders 48,000 45.000 45.000
DVDs 15.000 14.000 14.000
Total inventory

99
ACT 1600 Fundamentals of Financial Accounting

Problems
Problem 6-1
The inventory records of Jeremiah Company reveals the following data for the month of October,
20XX
Date Description Units Unit cost or
Selling price
Oct 1 Beginning inventory 60 $24
Oct 9 Purchase 120 26
Oct 11 Sale 100 35
Oct 17 Purchase 70 27
Oct 22 Sale 65 40
Oct 25 Purchase 80 28
Oct 29 Sale 120 40

Instructions :
1. Calculate each of the following under FIFO and Average- cost methods assuming the company is
following periodic inventory system.
a) Cost of ending inventory
b) Cost of goods sold
c) Gross profit
d) Gross profit rate

Date Description Units Unit Cost CGAS

Total units available for sale

Sales revenue
Date Total sales
Units Unit Price

1. FIFO
a) Cost of ending inventory

b) Cost of goods sold

c) Gross profit

d) Gross profit rate

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ACT 1600 Fundamentals of Financial Accounting

2. Average cost method.

a) Cost of ending inventory

b) Cost of goods sold

c) Gross profit

d) Gross profit rate

Problem 6-2
The following information is provided for Aura Company. Aura uses the periodic inventory method of
accounting for tts
· mventory.
·
Date Description UniJs Unit cost or
selling price
June 1 Beginning inventory 40 $40
4 Purchase 135 43
10 Sale 110 70
11 Sale return 15 70
18 Purchase 55 46
18 Purchase return 10 46
25 Sale 60 75
28 Purchase 30 50

Instructions: Calculate (a) Cost of Ending inventory, (b) Cost of goods sold (c) Gross profit (d) Gross
profit rate under each of the following methods.
(1) FIFO (2) Average-cost.

Date Description Units Unit Cost CGAS

Total units available for sale

Units sold
Ending inventory in units

Sales revenue
Date e Total sales
Units Unit price

101
ACT 1600 Fundamentals of Financial Accounting

1. FIFO
a) Cost of ending inventory

b) Cost of goods sold

d) Gross profit rate

2. Average cost method.

a) Cost of ending inventory

b) Cost of goods sold

c) Gross rofit

d) Gross rofit rate

Problem 6-3
The following information is provided for Dcore De Company. Dcore De uses the periodic inventory
method of acco untmg
· flor Its
· teak mventory.
·
Unit cost or
Date Description Units
selling_l!_rice
October 1 Beginning inventory 100 $8
2 Purchase 100 9
11 Sales 200 20
29 Purchase 200 10
30 Purchase returns 100 10
31 Sales 80 20

Instructions: Calculate (i) Cost of goods available for sale (ii) Cost of Ending inventory, (iii) Cost of
goods sold (iv) Gross profit (v) Gross profit rate under each of the following methods.
(1) FIFO.
(2) Average-cost.

Date Description Units Unit Cost CGAS

Total units available for sale

Units sold
Ending inventory in units

102
ACT 1600 Fundamentals of Financial Accounting

Sales revenue
Date Total sales
Units Unit Price

i) Cost of goods available for sale:

1. Use the FIFO method.

(ii)_ Cost of ending inventory (iii) Cost of goods sold

(iv) Gross profit (v)_ Gross profit rate

-
2 Uset h e A verage-c ost met h od .
(ii)Cost of ending inventory (iii)Cost
. of goods sold

(iv) Gross profit (v) Gross profit rate

Problem 6-4
Srimongkol Paint is a wholesaler of enamel paint operating in Bangkok. Srimongkol Paint uses the
perpetual inventory method. You are provided with the following information for the month of
J anuary, 20XX
Quantity Unit cost or selling
Date Description
(Units) price
January I Beginning inventory_ 150 $20
January 2 Purchase 100 25
January 6 Sales I80 40
January IO Purchase I90 28
Janmtry 11 Purchase returns IO 28
January 30 Sales 140 40

Instructions:
I. Prepare the Inventory stock card by using the FIFO method.
2. Compute the a) Cost of Ending inventory, b) Cost of Goods Sold, c) Gross profit d) Gross profit rate.
Inventory Stock Card by Using FIFO method.

103
ACT 1600 Fundamentals of Financial Accounting

Date Purchases Cost of goods sold Balance

Units @ Total Units @ Total Units @ Total

2.

a) Cost of ending inventory =

b) Cost of goods sold=

c) Gross profit =

d) Gross profit rate =

Problem 6-5
Fond Inc. uses the perpetual inventory method. The following information is for the month of January
20XX.
Unit cost or
Date Description Quantity
January 1 Beginning Inventory 100 $14
January 5 Purchase 150 17
January 8 Sale 110 28
January 10 Sale return 10 28
January 15 Purchase 55 19
January 16 Purchase return 5 19
January 20 Sale 80 32
January 25 Purchase 30 22
Instruction:
Calculate the (i) Cost of ending inventory (ii) Cost of goods sold (iii) Gross profit (iv) Gross profit rate
under FIFO method.

104
ACT 1600 Fundamentals of Financial Accounting

nventory stoc k card

Purchases Cost of Goods sold Balance
Date Unit Unit Unit
Units Cost Units Cost Units Cost
cost cost cost

i ) Cost of ending inventory

ii) Cost of goods sold

iii) Gross profit

iv) Gross profit rate

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ACT 1600 Fundamentals of Financial Accounting

Problem 6-6

The inventory records of Skyline Company reveal the following data for the month of June, 20XX.

Quantity Unit cost

Date
Units $
20XX
June. I Beginning Inventory 900 30
6 Sales 200
15 Purchases 1,200 39
16 Purchase Retums & Allowances 200 39
20 Sales 800
22 Sales Returns from June 20 sales 100
30 Purchases 1,100 51

Instructions:
I. Complete the inventory record card assuming that the company uses perpetual inventory system
and first-in, first-out (FIFO) cost flow assumption and determine the following for the month of
June.
(a) Cost of ending inventory.
(b) Cost of goods sold.

2. Assuming that the company applies periodic inventory system and average cost method, compute
the following: -
(a) Total units available for sales.
(b) Total cost of goods available for sales.
(c) Cost of ending inventory.
(d) Cost of goods sold.

I. Stock card by using FIFO method

Purchases Cost of goods sold Balance

Date Unit Unit Unit
Units Total Units Total Units Total
cost Cost Cost
June 1

15

16

20

22

30

106
ACT 1600 Fundamentals of Financial Accounting

a) Cost of ending inventory

b) Cost of goods sold

2. Periodic Inventory System: (Average cost method)

(a) Total units available for sales (b) Total cost of goods available for sales

(c) Cost of ending inventory (d) Cost of goods sold

Problem 6-7
The inventory records of Isaac Company reveal the following data for the month of August 20XX.

Quantity Unit cost

Date
Units $
20XX
Aug. 1 Beginning Inventory 1,600 21
5 Sales 1,000
15 Purchases 2,000 19
25 Purchases 1,400 22
27 Sales 1,200
29 Sales 1,600
30 Sales Return 300
31 Purchases 1,000 23

Instructions:
1. Complete the inventory record card provided in the answer sheet assuming that the company uses
perpetual inventory system and first-in, first-out (FIFO) cost flow assumption and determine the
following for the month of August.
(a) Cost of ending inventory.
(b) Cost of goods sold.
2. Assuming that the company applies periodic inventory system and average cost method
compute the following: -
(a) Total units available for sales.
(b) Total cost of goods available for sales.
(c) Cost of ending inventory.
(d) Cost of goods sold.

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ACT 1600 Fundamentals of Financial Accounting

!.Perpetual Inventory System. (FIFO)

I nventory stoe k card
Purchases Cost of Goods sold Balance
Date Unit
Units Unit cost Total Units Unit cost Total Units Total
cost

a. Cost of ending inventory

b. Cost of goods sold

2. Periodic Inventory System (Average cost)

a. Total units available for sales.

b. Total cost of goods available for sales.

c. Cost of ending inventory.

d. Cost of goods sold.

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ACT 1600 Fundamentals of Financial Accounting

Problem 6-8
Feni Company applied FIFO to its inventory and got the following results for the ending inventory.
Cameras 100 units at a cost per unit of$ 68
DVD players 150 units at a cost per unit of$75
iPods 125 units at a cost per unit of $80
The net realizable value per unit at year-end was cameras$ 70, DVD players $69, and iPods $78.

Instruction:
Determine the amount of ending inventory at lower-of-cost-or-net realizable value.

Problem 6-9

Thunderbum Appliance Center accumulates the following cost and net realizable value data at
December 31.
Inventory Categories Cost Net realizable value
Cameras $ 12,000 $ 12,100
Camcorders 9,500 9,200
DVD players 14,000 12,800

Compute the lower-of-cost-or-net realizable value valuation for the company's total inventory.

********************************

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ACT1600 Fundamentals of Financial Accounting

CHAPTER 7
BANK RECONCILIATION
Objectives: After studying this chapter, you should be able to prepare a bank reconciliation and
prepare necessary adjusting entries based on the reconciliation.

Use of Banks
For good internal control over cash the use of banks plays a significant role. A company can safeguard
its cash by using a bank as a depository and as a clearing house for checks received and written. The
amount of cash on hand can be minimized. The use of bank facilitates the control of cash because it
creates a double record of all bank transactions - one by the company and the other by the bank. A bank
reconciliation compares the bank's balance with company's "Cash" balance and explains any
differences to make them agree.
Making bank deposits
An authorized company's employee should make a bank deposit supported by documents called deposit
slip. Deposit slips are prepared in duplicate copy, the bank retains the original copy and the duplicated
copy is kept by the depositor. The deposit slip must be stamped by the bank to establish its authenticity.

Writing checks
A check is a written order signed by the depositor directing the bank to pay a specified sum of money to
a designated recipient. There are three parties to a check:
(1) The maker (or drawer) who issues the check
(2) The bank (or payer) on which the check is drawn
(3) The payee to whom the check is payable.
A check is a negotiable instnnnent that one party can transfer to another patty by endorsement.

Bank Statements
A bank statement shows the depositor's bank transactions and balances. Each month, a depositor
receives a statement from the bank. It shows:
(1) Checks paid and other debits that reduce the balance in the depositor's account
(2) Deposits and other credits that increase the balance in the account
(3) The account balance after each day's transactions.
The bank statement lists in numerical sequence all "paid" checks, along with the date the check was paid
and its amount. Upon paying a check, the bank stamps the check "paid". is sometimes
referred to as a On the statement of the bank also includes memoranda explaining other
debits and credits it made to the depositor's account.

Debit Memorandum
Bank debit memorandum may include the following:
• Bank Service Charge (SC) - bank monthly fee for their services or charge the depositor when the
average monthly balance in the checking account falls below the specified amount.
• Cost of printing checks
• Issuing travel checks
• Writing funds to other locations.
A symbol DM is often used for the above charges.
Banks also use a debit memorandum when a deposited check from a customer "bounces" because of
insufficient funds. For example, ABC Co., a customer of XYZ Co. sends a check for $500 to XYZ Co.
for services provided. Unfortunately, ABC Co. does not have sufficient funds in its bank to pay for these
services. ABC Co.'s bank marks the check NSF (not sufficient funds) and returns it to XYZ Co.'s bank.
XYZ's bank then debits XYZ's account. The bank sends the NSF check and debit memorandum to XYZ
Co. as notification of the charge. XYZ then records Accounts Receivable from ABC Co. and reduces
cash for the NSF check.

Credit Memorandum
Bank credit memorandum may include the following:
• Collection of notes receivable by the bank. A symbol CM on the banks statement appears.
• Banks also offer interest on checking accounts. The interest earned may be indicated on the bank
statement by the symbol CM or INT.

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ACTI600 Fundamentals of Financial Accounting

RECONCILING THE BANK ACCOUNT

The bank and the depositor maintain independent records of the depositor's checking account. The two
balances are seldom the same at any given time. Therefore, it is necessary to make the balance per books
agree with the balance per bank- a process called reconciling the bank account. The lack of agreement
between the two balances has two causes:
1. Time lags that prevent one of the parties from recording the transaction in the same period as the
other party.
2. Errors by either party in recording the transactions.
Time lags occur frequently. For example, several days may elapse between the time the depositor mails
a check to a payee and the bank pays the check. Similarly, when the depositor uses the bank depository
to make its deposits. There will be a difference of at least one day between the time the depositor records
the deposit and the time the bank records it. A time lag also occur whenever the bank mails the debit or
credit memorandum to the depositor.

Either party could accidentally record a $450 check as $45 or $540. Also, the bank might mistakenly
charge a check to a wrong account by keying in an incorrect account name or number.

RECONCILIATION PROCEDURE
The bank reconciliation should be prepared by an employee who lras no other responsibilities pertaining
to cash.
In reconciling the bank account, it is customary to reconcile the balance per books and balance per bank
to their adjusted cash balances. The starting point in preparing the reconciliation is to enter the balance
per banks statement and balance per books on the reconciliation schedule. The company then makes
various adjustments.
The following items causes the difference between two balances:
>- Deposits in transit. Compare the individual deposits listed on the bank statement with deposits
in transit from the preceding bank reconciliation and with the deposits per company records or
duplicate deposit slips. Deposits recorded by the depositor that have not been recorded by the
bank are the deposits in transit. Add deposits in transit to the balance per hank.
>- Outstanding checks. Compare the paid checks shown on the bank statement with (a) checks
outstanding from the previous bank reconciliation, and (b) checks issued by the company as
recorded in the cash payments journal (or in the check register in your personal checkbook).
Issued checks recorded by the company but that have not yet paid by the bank are outstanding
checks. Deduct outstanding checks from the balance per the hank.
>- Credit memo items. These are usually the revenue items on which cash was collected by bank
for the business and recorded in the deposit column of bank statement but these items are not
recorded in the business records. Eg: Notes receivable, interest earned. They are added to the
balance per hooks.
>- Debit memo items. These are expense paid by bank on behalf of the business but not recorded in
the business cash payment journal. Eg: Notes payable, Safety deposit box rent, bank service
charge. They are deducted from the balance per hooks.
NSF Check (Bounced check): This is a check received by the business from a customer,
which then given to the bank to collect cash from the bank of the customer. But the customer
bank refuse to pay money on the check saying that there is 'NOT SUFFICIENT FUND' in
customer account. They are deducted from the balance per hooks.
>- Errors. Note any errors discovered in the foregoing steps and list them in the appropriate section
of the reconciliation schedule. For example, if the company mistakenly recorded as $450 a paid
check correctly written for $540, it would deduct the error of $90 from the balance per books.
All errors made by the depositor are corrected under the balance per books. In contrast, all
errors made by the bank are corrected under the balance per the hank.

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ACTI600 Fundamentals of Financial Accounting

BANK RECONCILIATION ILLUSTRATED

The bank statement of Lanka Company shows a balance per bank of$I5,907.45 on April30, 20I9. On
this date the balance of cash per books is $11,589.45. Using the four reconciliation steps, Lanka
determines the following reconciling items:
Step I. Deposits in transits. April 30 deposit received by the bank on May I. $2,201.40
Step 2. Outstanding checks. No. 453, $3,000.00; no. 457, $1,401.30; no. 460, $I,502.70
Step 3. Errors. Lanka wrote check no. 443 for $I,226.00 and the bank correctly paid that amount. Lanka
recorded the check as $I,262.00
Step 4. Bank memoranda:
(a) Debit- NSF check from L.L.Dutt for $I 00.
(b) Debit- Charge for printing company checks $30.60
(c) Debit - Payment of a notes payable $300 plus interest expense $25
(d) Credit- Collection of note receivable for $1,000 plus interest earned $50, less bank collection
fee $I5.00
Lanka Company
Bank Reconciliation
April 30, 2019

Cash balance per bank statement $15,907.45

Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks:
No. 453 $3,000.00
No. 457 1,401.30
No. 460 1,502.70 5,904.00
Adjusted cash balance per bank $12.204.85

Cash balance per books $11,589.45

Add: Collection of note receivable $1,000, plus Interest
Earned $50, less collection fee $15 $1,035.00
Error in recording check no. 443 ($1 ,226 - $1 ,262) 36.00 1,071.00
12,660.45
Less: NSF check 100.00
Bank service charge 30.60
Payment of note payable (300), plus interest expense (25) 325.00 455.60
Adjusted cash balance per books $12.204.85

Lanka Company would make the following entries on April 30.

Collection ofNote Receivable

Date Account Title Debit Credit
April 30 Cash 1,035.00
Miscellaneous Expense 15.00
Notes Receivable 1,000.00
Interest Revenue 50.00
(To record collection of note receivable by bank)

Book error. The cash disbursements journal shows that check no. 443 was a payment on account to
r The correctmg
Andy Company, a suppller. · entry IS:
·
Date Account Title Debit Credit
April 30 Cash 36.00
Accounts Payable- Andy Co. 36.00
(To correct error in recording check no. 443)

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ACTI600 Fundamentals of Financial Accounting

NSF check
Date Account Title Debit Credit
April 30 Accounts Receivable - L.L.Dutt 100.00
Cash 100.00
(To record NSF check)

B an k servzce charge
Date Account Title Debit Credit
April 30 Miscellaneous Expense** m. 30.60
Cash 30.60
(To record charge for printing company checks)

otes p ay_ableandlnterest Expense

Date Account Title Debit Credit
April 30 Notes Payable 300.00
Interest Expense 25.00
Cash 325.00
(To record for payment of NIP & Interest))

**A general ledger account in which very small amounts are recorded (Examples: Bank service
charge, travel expenses, check printing charges, ticket fee)

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ACT1600 Fundamentals of Financial Accounting

PROBLEM SOLVING
Problem 7-1
On May 31, 2019, Terrain Company had a cash balance per books of $6,781.50. The bank statement
from SBI Bank on that date showed a balance of $6,804.60. A comparison of the statement with the
Cash account revealed the following facts.
1. The statement included a debit memo of $40 for the printing of additional company checks.
2. Cash sales of $836.15 on May 12 were deposited in the bank. The cash receipts journal entry and
the deposit slip were incorrectly made for $886.15. The bank credited Terrain Co. for the correct
amount.
3. Outstanding checks at May 31 totaled $276.25. Deposits in transit were $1,916.15.
4. On May 18, the company issued check no. 1181 for $685 to Bruno on account. The check, which
cleared the bank in May, was incorrectly journalized and posted by Terrain Co. for $658.
5. A $3,000 note receivable was collected by the bank for Terrain Co. on May 31 plus $80 interest.
The bank charged a collection fee of $20. No interest has been accrued on the note.
6. Included with the cancelled checks was a check issued by Bijil Co. to Jon Jone for $600 that was
incorrectly charged to Terrain Co. by the bank.
7. On May 31, the bank statement showed an NSF charge of $680 for a check issued by Sundry
Gibon, a customer, to Terrain Co. on account.

Instructions:
(a) Prepare the bank reconciliation at May 31, 20 19.
(b) Prepare the necessary adjusting entries for Terrain Co. at May 31, 2019.

a)

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ACT1600 Fundamentals of Financial Accounting

b)
Date Account Title Debit Credit
2019

Problem 7-2
You have been assigned the task of preparing the June 2019 bank reconciliation for Jewel Inc. You have
gathered the following information:
(a) The balance on the June 30 bank statement is $16,870; the Cash account shows a $13,540
balance on the same date.
(b) A bank service charge of$90 appears on the bank statement; this charge has not been recorded in
the books.
(c) Checks written by Jewel Inc. that have not yet cleared the banks total $3,160.
(d) An error was made in recording check no. 9872. The $28 check to pay for freight on
merchandise purchased was recorded on the books as $82. (the company is using periodic
inventory system)
(e) A deposit for $1,496 made late on June 30 does not appear on the bank statement.
(f) A customer's check for $58 was returned with the bank statement marked NSF.
(g) The bank collected for Jewel Inc. $1,760 on a note left for collection. The $1,760 includes $160
interest that was collected in addition to the face value of $1,600.
(Note: No accrual of interest on Notes Receivable has been made.)
Instructions:
1. Prepare the June 30, 2019 bank reconciliation.
2. Prepare the journal entries that will be necessary as a result of this reconciliation.

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ACT1600 Fundamentals ofFinancial Accounting

(1)

Answer to
(2)

Date Account Title Debit Credit

2019

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ACT1600 Fundamentals of Financial Accounting

Problem 7-3
Raymond Company's bank statement at January 31, 2019 showed a balance per bank of $7,000. The
company's Cash account in the general ledger had a balance of $4,667 at January 31. Other information
is as follows:
(1) Cash receipts for January 31 recorded on the company's books were $5,000 but this amount does
not appear on the bank statement.
(2) The bank statement shows a debit memorandum for $60 for check printing charges.
(3) The total amount of checks still outstanding at January 31 amounted to $5,800.
(4) Check No. 135 was correctly written and paid by the bank for"$429. The cash payment journal
reflects an entry for Check No. 135 as a debit to Accounts Payable and a credit to Cash in Bank for
$492.
(5) The bank returned an NSF check from a customer, Arnold Co., for $530.
(6) The bank included a credit memorandum for $2,060 which represents collection of a customer's
note by the bank for the company; principal amount of the note was $2,000 and interest was $60.
Interest has not been accrued.
Instructions:
(a) Prepare bank reconciliation for Raymond Company at January 31, 2019.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

(a) Prepare bank reconciliation for Raymond Company at January 31, 2019.

Raymond Company
Bank Reconciliation
January 31,2019

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ACT1600 Fundamentals of Financial Accounting

(b)

Date Account Title Debit Credit

Problem 7-4

The following information is available to reconcile Live In Company's book balance of cash with its
bank statement cash balance as at December 31, 2019.
a. The December 31 cash balance according to the accounting records (books) is $32,021 and the bank
statement cash balance for that date is $45,091.
b. Check No. 123 for $1,084 and Check No.l28 for $390, both written and entered in the accounting
records in December, are not among the canceled checks in the bank statement.
c. When the December checks in bank statement are compared with entries in the accounting records,
it is found that Check No.126 had been correctly drawn for $2,400 to pay for office supplies but
was erroneously entered in the accounting records (books) as $2,440.
d. Also returned with the bank statement is an NSF check for $749. This check had been received
from a customer, KPV Industries, in payment of its account.
e. A debit memorandum enclosed with the bank statement for $79 was the charge for printing of
checks.
f. A credit memorandum indicates that the bank collected $20,000 cash on a note receivable for the
company, and credited to Company's cash account.
g. It was found that Check No.130 for $573 issued by Live In Company to Amster Inc. was
erroneously charged by the bank as $753.
h. On December 31, the bank issued a credit memorandum for $64 interest earned on Live In's
checking account for the month of December.
1. Live In's December 31 daily cash receipts of $7,500 were placed in the bank's night depository on
that date, but do not appear on the December31 bank statement. This was the deposits in transit.

Instructions:
1. Prepare the bank reconciliation as at December 31,2019.
2. Prepare the adjusting entries at December 31, 2019.

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ACT1600 Fundamentals of Financial Accounting

(l) Prepare bank reconciliation as at December 31, 2019:

Live In Company
Bank Reconciliation
December 31, 2019

"'

Date Account Title Debit Credit

2019

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ACT1600 Fundamentals of Financial Accounting

Problem 7-5
Oval Company provided the following data regarding its cash transactions in December 2019.
1) On Nov 30, the company's cash account had a balance of$5,597.
2) On Dec 31, the total cash receipt was$ 9,900 and the total cash payment was $2,009.
3) Balance as per bank statement on Dec 31 was $16,470.
4) The bank had credited the proceeds $2,265 of a note receivable to the company's account.
Face value of the note was $2,250, the balance was an interest.
5) A check received from Mr. Jim for $90 was returned by the bank because of insufficient
funds.
6) The bank deducted $6 for service charge.
7) Two checks all issued in December had not yet been paid by the bank. They were checks no:
590 for $1,000 and no: 598 for $650.
8) A check received from Nana Company for $486 from providing services was erroneously
recorded in the book as $648.
9) A late deposit of $1,425 on Dec 31 did not appear on the bank statement.
10) The bank statement showed that a deposit of $750 by Viva store had been mistakenly
credited to the Oval co. account.

Instructions:
(a) Prepare a Bank Reconciliation for the month of December 31, 20 19.
(b) Journalize transactions needed to update Oval Company's cash account.

a)

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ACT1600 Fundamentals of Financial Accounting

b) Adjusting Entries

Date Account Titles Debit Credit

**********************************************

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ACT1600 Fundamentals of Financial Accounting

CHAPTERS
ACCOUNTING FOR RECEIVABLES
Study Objectives:
After studying this chapter, you should be able to:
• IdentifY the different types of receivables.
• Explain how companies recognize accounts receivable.
• Distinguish between the methods and bases companies use to value accounts receivable'
• Describe the entries to record the disposition of accounts receivable.
• Compute the maturity date and interest on notes receivable.
• Explain how companies recognize notes receivable.
• Describes how companies value notes receivable.
• Describe the entries to record the disposition of notes receivable.
• Explain the statement presentation of receivables.
Types of Receivables
Receivables are amounts due from individuals and other companies that are expected to be collected in
cash.
• Accounts Receivable are amounts owed by customers that result from the sale of goods and
services.
• Notes Receivable are written promises (as evidenced by a formal instrument) for amounts to be
received.
• Other Receivables are nontrade receivables which include interest, loans to officers, and
advances to employees.

ACCOUNTS RECEIVABLE
Three accounting issues:
!.Recognizing accounts receivable.
2.Valuing accounts receivable
3.Disposing of accounts receivable

l.Recognizing accounts receivable

• Service organization- records a receivable when it provides service on account.
• Merchandiser records accounts receivable at the point of sale of merchandise on account.
Illustration: Assume that Hennes & Mauritz on July l, 2019, sells merchandise on account to Polo
Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books
of Hennes & Mauritz.
July l Accounts Receivable 1,000
Sales Revenue 1,000
On July 5, Polo returns merchandise worth $100 to Hennes & Mauritz.
July 5 Sales Returns and Allowances 100
Accounts Receivable 100
On July 11, Hennes & Mauritz receives payment from Polo Company for the balance due.
July 11 Cash 882
Sales Discounts (900 x 2%) 18
Accounts Receivable 900

2.Valuing Accounts Receivable

customers of a business may not be trustworthy or credit worthy to pay the cash on or
before the due date.
such amount of receivables the business cannot collect from customers is treated as 'bad debts
or "uncollectible account expense' which is to be written -off (cancelled) every year.
• Current asset.
• Valuation (net realizable value).
Uncollectible Accounts Receivable
• Sales on account raise the possibility of accounts not being collected.
• Seller records losses that result from extending credit as Bad Debt Expense.

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ACT1600 Fundamentals of Financial Accounting

Methods of Accounting for Uncollectible Accounts

.>Direct Write-Off
Theoretically undesirable:
o No matching.
o Receivable not stated at cash realizable value.
o Not acceptable for financial reporting.

Bad debt expense ...................... xx

Accounts receivable............... xx
.>Allowance Method
Losses are estimated:
o Better matching.
• Receivable stated at cash realizable value.
o Required by IFRS
How are these accounts presented on the Statement of Financial Position?
ABC Corporation ·
Statement of Financial Position (partial)
Current Assets
Cash $330
Accounts receivable $257
Less: Allowance for doubtful accounts 30 227
Supplies 40
Inventory 812
Total current assets $1,409

I. Direct Write-off Method for Uncollectible Accounts

Write-off Uncollectible Accounts
Bad Debt expense ................ xx
Accounts Receivable.... xx
Illustration: Assume that Warden Co. writes-off M. E. Doran's $1,600 balance as uncollectible on
December 12. Warden's entry is:

Bad Debt Expense 1,600

Accounts Receivable 1,600

II. Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts receivable. (Adjusting entry)
Bad Debt Expense ............................ xx
Allowance for Doubtful accounts.... xx

2. At the time the specific account is written-off as uncollectible.

Allowance for Doubtful accounts ................ xx
Accounts Receivable........................ xx
Illustration: Hampson Furniture has credit sales of$1,200,000 in 2019, ofwhich $200,000 remains
uncollected at December 31. The credit manager estimates that $12,000 of these sales will prove
uncollectible.
Dec. 31 Bad Debt Expense 12,000
Allowance for Doubtful accounts 12,000

Presentation of allowance for doubtful accounts

Hampton Furniture
Statement of Financial Position (Partial)

Current assets
Cash $14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts 12,000 188,000
Supplies 25,000
Inventory 310,000
Total current assets $537,800

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ACT1600 Fundamentals of Financial Accounting

Recording Write-Off of an Uncollectible Account

Illustration: The financial vice-president of Hampson Furniture authorizes a write-off of the $500
balance owed by R. A. Ware on March 1, 2019. The entry to record the write-off is:
Mar. 1 Allowance for Doubtful accounts 500
Accounts Receivable 500

Recoyery of an Uncollectible Account (2 journal entries)

Illustration: On July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1.
Hampson makes these entries:
• Reinstate the iournal entcv during write-q,ff of accounts receivable
Jul. 1 Accounts Receivable 500
Allowance for Doubtful accounts 500
• Record the cash collection
Jul. 1 Cash 500
Accounts Receivable 500

Methods of estimating uncollectible

•!• Percentage-of-Sales :(No consideration is given to existing balance/Unadjusted
balance in the allowance account.)
Illustration: Assume that Gonzalez Company elects to use the percentage-of-sales basis. It concludes
that 1% of net credit sales will become uncollectible. If net credit sales for 2018, is $800,000, the
adjusting entry is:
Dec. 31 Bad Debt Expense 8,000
Allowance for Doubtful accounts 8,000
(800,000 X 1% = 8,000)

•!•Percentage of receivables :( Existing balance I unadjusted balance in the

allowance account needs to be considered)
Aging of the Accounts Receivables
C ustomer b a lances are c lass1.fi1e db)y t1e
I length of time
. they h ave b een unpa1.d .

Number of Days Past Due

Customer Total Not Yet
Due 1-30 31-60 61-90 Over 90
T. E. Adert $600 $300 $200 $100
B. C. Bortz 300 $300
B. A. Carl 450 200 $250
0. L. Diker 700 500 200
T. 0. Ebbet 600 300 300
Others 36,950 26,200 5,200 2,450 1,600 1,500
$39.600 $27,000 1?='=000 ,t2='=000 900
Estimated Percentage 2% 4% 10% 20% 40%
Uncollectible

Total Estimated Bad $540 $228 $300 $400 $760

Debts

Total estimated bad debts for the company $ 2,228

e $2,228 represents the required balance/targeted balance/ total allowance/ ending balance
in Allowance for doubtful accounts at the balance sheet date.
e The amount of the bad debt adjusting entry is the difference between the required balance
and the existing balance I unadjusted balance/ prior balance in the allowance account.

Estimating the Allowance

Illustration: Assume the unadjusted trial balance shows Allowance for Doubtful Accounts with a
credit balance of $528. Prepare the adjusting entry assuming $2,228 is the estimate of uncollectible
receivables from the aging schedule.
Dec. 31 Bad Debt Expense 1,700
Allowance for Doubtful accounts 1,700
(2,228- 528 = 1,700)

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ACT1600 Fundamentals of Financial Accounting

NOTES RECEIVABLE
Companies may grant credit in exchange for a promissory note. A promissory note is a written promise
to pay a specified amount of money on demand or at a definite time.
Promissory notes may be used
1. when individuals and companies lend or borrow money,
2. when amount of transaction and credit period exceed normal limits, or
3. in settlement of accounts receivable.
To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note
payable.

Determining the Maturity Date

Note expressed in terms of
+ Months (use 12 as denominator)
+ Days (use 360 days as denominator)

Computing Interest
Face Value x Annual Interest Rate x Time in Terms of One Year = INTEREST

When counting days, omit the date the note is issued, but include the due date.

Recognizing Notes Receivable

Illustration: Calhoun Company wrote (issued) a £1,000, two-month, 12% promissory note dated May
1 to Wilma Company, to settle an open account (Accounts receivable). Prepare the journal entry Wilma
Company would record for the receipt of the note.
May 1 Notes Receivable 1,000
Accounts Receivable 1,000

Valuing Notes Receivable

+ Report short-term notes receivable at their cash (net) realizable value.
+ Estimation of cash realizable value and bad debts expense are done similarly to accounts
receivable.
+ Allowance for Doubtful Accounts is used.

Disposing of Notes Receivable

1. Notes may be held to their maturity date.
2. Maker may default and payee must make an adjustment to the account.
3. Holder speeds up conversion to cash by selling the note receivable (will not be discussed)

+Honor of Notes Receivable

•Maker pays it in full at its maturity date.

+Dishonor of Notes Receivable

•Not paid in full at maturity- (Expect future I eventual collection of cash)
•No longer negotiable- (No future collection of cash expected. Write-off the notes receivable at
face value/principal amount)

Honor of Notes Receivable

Illustration: Wolder Co. lends Higley Co. $10,000 on June 1, accepting a five-month, 9% interest note.
If Wolder presents the note to Higley Co. on November 1, the maturity date, Walder's entry to record
the collection is:
June 1 Notes Receivable- Higley Co 10,000
Cash 10,000

Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Revenue (10,000 x 9% x 5/12) 375

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ACT1600 Fundamentals of Financial Accounting

Accrual of Interest Receivable

Suppose instead that Wolder Co. prepares financial statements as of September 30. The adjusting entry
by Wolder is for four months (June 1- Sept 30) accrued interest ending Sept. 30.
Sept. 30 Interest Receivable 300
Interest Revenue (10,000 x 9% x 4/12) 300

Prepare the entry Wolder would make to record the honoring of the Higley note on November I.
Nov. 1 Cash 10,375
Notes Receivable 10,000
Interest Receivable 300
Interest Revenue (10,000 x 9% x 1/12) 75

Dishonor of Notes Receivable

Illustration: Assume that Higley Co. on November I indicates that it cannot pay at the present time.
If Wolder Co. does expect eyentual collection, it would make the following entry at the time the note
is dishonored (assuming no previous accrual of interest).
Nov. 1 Accounts Receivable 10,375
Notes Receivable 10,000
Interest Revenue 375

Illustration: Assume that Higley Co. on November 1 indicates that it cannot pay at the present time.
If Wolder Co. does NOT expect col!ectjon, it would make the following entry at the time the note is
dishonored (assuming no previous accrual of interest).
Nov. 1 Allowance for Doubtful account 10,000
Notes Receivable 10,000

Note: Write-off only the principal amount.

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ACT1600 Fundamentals of Financial Accounting

EXERCISES

Exercise 1: Compute interest and find the maturity date for the following notes:
Date of Note Principal Interest Rate(%) Terms
(a) June 10 $80,000 6% 60 days
(b) July 14 $64,000 7% 90 days
(c) April27 $12,000 8% 75 days

Interest Maturity Date

(a)
(b)
(c)

Exercise 2: Presented below are data on three promissory notes. Determine the missing amounts:
Date of Note Terms Maturity Date Principal Annual Interest Rate Total Interest
(a)Aprill 60 days ? $600,000 5% ?
(b )July 2 30 days ? 90,000 ? $600
(c)March 7 6 months ? 120,000 10% %

Maturity Date Annual Interest Rate Total Interest

(a)
(b)
(c)

Exercise 3: The ledger of Melbourne Company at the end of the current year shows Accounts
Receivable $110,000, Sales Revenue $840,000 and Sales Returns and Allowances $28,000.
Instructions:
(a) If Melbourne uses the direct write-off method to account for uncollectible accounts, journalize
the adjusting entry at December 31, assuming Melbourne determines that Sandy's $1,400
balance is uncollectible.
(b )If Allowance for Doubtful Accounts has a credit balance of $2, I 00 in the trial balance, journalize
the adjusting entry at December 31, assuming bad debts are expected to be (I) 1% of net sales,
and (2) 10% of accounts receivable.
(c)If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize
the adjusting entry at December 31, assuming bad debts are expected to be (I) 0.75% of net
sales and (2) 6% of accounts receivable.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Exercise 4: At Dec. 31, 2019, Curtis Co. had a credit balance of $15,000 in Allowance for Doubtful
Accounts. During 2020, Curtis wrote-off accounts totaling $14,100. One of those accounts ($1,800)
was later collected. At Dec. 31, 2020, an aging schedule indicated that the balance in Allowance for
Doubtful Accounts should be $19,000.

Instructions: Prepare journal entries to record the 2020 transactions of Curtis Co.

Date Account Title Debit Credit

Allowance for Doubtful Accounts

Exercise 5: On Dec. 31, 2019, Romualdo Co. estimated that 2% of its net sales of $360,000 will be
uncollectible. The company recorded this amount as an addition to Allowance for Doubtful Accounts.
On May 11, 2020, Romualdo Co. determined that the B. Ventura's account was uncollectible and
wrote-off $1,100. On June 12, 2020, Ventura paid the amount previously written off.
Instructions:
Prepare the journal entries on Dec. 31, 2019, May 11, 2020 and June 12, 2020.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Exercise 6: Matrix Supply Co. has the following transactions related to notes receivable during the last
2 months of 2020. The company does not make entries to accrue interest except at Dec. 31.
Nov. 1 Loaned $15,000 cash to Jeanne Ham on a 12-month, 9% note.
Dec. II Sold goods to Bobby Brown, Inc. receiving a $6,750, 90- day, 8% note.
16 Received a $4,400, 180-day, 12% note in exchange for Richard Yap's outstanding accounts
receivable.
31 Accrued interest revenue on all note receivables.
Instructions:
(a) Journalize the transactions for Matrix's Supply Co.
(b) Record the collection of the Jeanne Ham's note at its maturity in 2021.
v',

a)
Date Account Title Debit Credit

*Calculation of interest revenue:

Jeanne Ham's note:
Bobby Brown's note:
Richard Yap's note:
Total accrued interest
(b)
Date Account Title Debit Credit

Exercise 7: Mailey Company had the following selected transactions:

May 1, 2020 Accepted Dianne Co.'s 12-month, 12% note in settlement of a $16,000 account
receivable.
July 1, 2020 Loaned $25,000 cash to Sam Davis on a 9-month, 10% note.
Dec 31,2020 Accrued interest on all notes receivable.
Apr. 1, 2021 Sam Davis dishonored its note; Mailey expects it will be eventually collected.
May 1, 2021 Received principal plus interest on the Dianne's note.
Ins t .
ructwns: Prepare J ouma1 entnes
" forib a ove transactiOns.
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Exercise 8: On May 2, Nancy Co. lends $7,600,000 to Calver Inc. issuing a 6-month, 8% note. At the
maturity, November 2, Calver indicates that it cannot pay.
Instmctions:
(a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note, assuming that Nancy Company expects
collection will occur.
(c) Prepare the entry to record the dishonor of the note, assuming that Nancy Co. does not expect
collection in the future.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problems
Problem 1:
At Dec. 31, 2020 Cafe Aroma Co. reported the following information on its statement of financial
position.
Accounts Receivable $975,000
Less: Allowance for Doubtful Accounts 80,000

During 2021, the company had the following transactions related to receivables.
1. Sales on account. .............................................................. $3,325,000
2. Sales returns and allowances ......................................... 52,000
3. Collections of accounts receivable ........................................... 2,824,000
4. Write-offs of accounts receivable deemed uncollectible................ 80,000
5. Recovery of bad debts previously written-off as uncollectible........ 30,000
Instructions:
(a) Prepare the journal entries to record each of these five transactions. Assume that no cash
discounts were taken on the collections of accounts receivable.
(b) Enter the January 2021 balances in Accounts Receivable and Allowance for Doubtful Accounts,
post the entries to the two accounts (use T-accounts), and determine the balances.
(c) Prepare the journal entry to record bad debt expense for 2021, assuming that an aging of
accounts receivable indicates that expected bad debts are $127,000
(a)
Date Account Title - Debit Credit
1.

2.

3.

4.

5.

(b)

Accounts Receivable Allowance for Doubtful Accounts

(c) Balance before adjustment .................................................................................. .

Balance needed .................................................................................................... .
Adjustment required ............................................................................................. .

The]Ourna
. entry wou ld there f,ore be as f,oll ows:
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problem 2:
Presented below is an aging schedule for Sytangco Company.

Number of Days Past Due

Not
Customer Total Yet Due 1-30 31-60 61-90 over 90
Sanders $28,000 $12,000 $16,000
Blake 40,000 $40,000
Cris 57,000 16,000 6,000 $35,000
De Jesus 34,000 $34,000
Others 132,000 96,000 16,000 14,000 6,000
$291,000 $152,000 $34,000 $30,000 $35,000 $40,000
Est. % Uncollectible 2% 6% 13% 25% 60%
Total Est. BID $41,730 $3,040 $2,040 $3,900 $8,750 $24,000

At Dec. 31, 2020, the unadjusted balance in Allowance for Doubtful Accounts is a credit of $9,000.

Instructions:
(a) Journalize and post the adjusting entry for bad debts at Dec. 31, 2020.
(b) Journalize and post to the allowance account the following events and transactions in the year
2021.
(1) On March 31, a $1,500 customer balance originating in 2020 is judged uncollectible
(2) On May 31, a check for $1,500 is received from the customer whose account was written
off as uncollectible on March 31.
(c) Journalize the adjusting entry for bad debts on Dec. 31, 2021, assuming that the unadjusted
balance in Allowance for Doubtful Accounts is a debit of $800 and the aging schedule indicates
that total estimated bad debts will be $31,000.

l(a) Date Account Title Debit Credit

(a) & (b)

Bad Debt Expense Allowance for Doubtful Accounts

b)
Date Account Title Debit Credit

l(c) Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problem 3:
Henry Sy Inc. uses the allowance method to estimate uncollectible accounts receivable. The company
produced the following aging of the accounts receivable at year-end.

Instmctions:
(a) Calculate the total estimated bad debts based on the above information.
(b) Prepare the year-end adjusting journal entry to record the bad debts using the aged uncollectible
accounts receivable determined in (a). Assume the current balance in Allowance for Doubtful
Accounts is a $3,000 debit.
(c) Of the above accounts, $5,000 is determined to be specifically uncollectible. Prepare the journal
entry to write-off the uncollectible account.
(d) The company collects $5,000 subsequently on a specific account that had previously been
determined to be uncollectible in (c). Prepare the journal entry(ies) necessary to restore the
account and record the cash collection.

a) Total estimated bad debts=_ _ _ _ _ _ _ _ _ __

Date Account Title Debit Credit

(b)

(c)

(d)

Problem 4:
At December 31, 2020, the trial balance of Roberto Company contained the following amounts before
adjustments.
Debits
Accounts Receivable $385,000
Allowance for Doubtful Accounts $800
Sales Revenue 918,000
Instmctions:
(a) Prepare the adjusting entry at Dec. 31, 2020, for bad debt expense under each of the following
independent assumptions.
(1) An aging schedule indicates that $11,750 of accounts receivable will be uncollectible.
(2) The company estimates that 1% of sales will be uncollectible.
(b) Repeat part (a) assuming that instead of a credit balance there is an $800 debit balance m
Allowance for Doubtful Accounts.
(c) During the next month, Jan. 2021, a $3,000 account receivable is written off as uncollectible.
Prepare the journal entry to record the write-off.
(d) Repeat part (c) assuming that Roberto uses the direct write-off method instead of the allowance
method in accounting for uncollectible accounts receivable.

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ACT1600 Fundamentals of Financial Accounting

a)
Date Account Title Debit Credit
(I) Dec. 31

(2) Dec. 31

b)
Date Account Title Debit Credit
(1) Dec. 31

(2) Dec. 31

(c)
Date Account Title Debit Credit
(1)

Date Account Title Debit Credit

Problem 5:
On January 1, 2021, Don Emilio Co. had Accounts Receivable $139,000. Notes Receivable $30,000,
and Allowance for Doubtful Accounts $13,200. The note receivable is from Rachel Co. It is a 4-month,
12% note dated Dec. 31, 2020. Don Emilio Co. prepares financial statements annually at Dec. 31.
During the year, the following selected transactions occurred.
Jan. 5 Sold $25,000 of merchandise to Thomas Co. terms n/15
20 Accepted Thomas Co.'s $25,000, 3-month, 9% note for balance due.
Feb. 18 Sold $9,000 of merchandise to Joaquin Co. and accepted Joaquin's $9,000, 6-month, 8%
note for the amount due.
Apr. 20 Collected Thomas Co. note in full.
30 Received payment in full from Rachel Co. on the amount due.
May25 Accepted Ricardo Inc.'s $4,000, 3-month, 7% note in settlement of a past due balance on
account.
Aug. 18 Received payment in full from Joaquin Co. on note due.
25 The Ricardo Inc. note was dishonored. Ricardo Inc. is not bankrupt; future payment is
anticipated.
Sept. 1 Sold $12,000 of merchandise to Flora Co. and accepted a $12,000 6-month, 10% note for
the amount due.
Instructions· Journalize the transactions
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

"',

.
Problem 6:
A. Roden Company gives the following information on its selected notes receivable and accounts
receivable transactions during the one-month accounting period ending on January 31, 2020:
Jan. 1 Accepted 30 days, 12% note for $6,000 from Aby Company in settlement of their account.
Jan. 15 Received payment in full on 30 days, 12% note for $9,000. The note was received on
December 16,2019.
Jan. 18 Wrote- off an accounts receivable that was due from a customer Mr. Nat, for $5,000 as it
was determined to be uncollectible.
Jan. 24 Mr. Nat paid $2,000 on his account which was written off as uncollectible and the cash
collection was recorded.
Jan. 31 The Aby Company note was dishonoured and there is no hope of future settlement.

Instructions: Journalize the above transactions.

B. The ledger of Elton Company at the end of the current accounting period (December 31) shows the
following account balances before adjustment.
Accounts Receivable $150,000
Sales $580,000
Sales Returns and Allowances $20,000
Allowance for doubtful accounts (debit) $500
Instructions: Prepare the adjusting entry at December31, to record bad debt expense under each
of the following assumptions:
1. Assume that Elton Company estimates 1% of net sales as uncollectible.
2. Assume that Elton Company estimates 5% of Accounts receivable as uncollectible.
3. A customer, Mr. Thomson became insolvent and his balance of accounts receivable for
$7,000 is determined to be uncollectible. Elton Company uses the direct write- off method
to record the bad debt expense. Prepare the journal entry.
A.
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

B.
Date Account Title Debit Credit

Problem 7:
On January 1, 2021, Stingy Kee Neiw Company had Accounts receivable $70,000 and allowance for
doubtful accounts $1,800. Stingy Kee Neiw Company prepares financial statements annually. During
th e year the floll owmg se Iected transactiOns
. occurre d .
Jan. 1 Wrote-offs of accounts receivable- Goodrich deemed uncollectible $2,000.
Jan. 5 Sold $58,000 of merchandise to Soo Company, terms 2/10, n/30.
Jan. 6 Soo Company retumed $5,000 of the merchandise purchased on Jan. 5.
Feb.2 Accepted a $700, 2- month, 10% promissory note from Newnew Company for the balance
I due.
May 1 Sold goods $20,000 for a promissory note, 12%, 2 months. Maker of the note is Blue Co.
July 1 Cash collection from Blue Company.
Sept. 30 Recovery of bad debts previously written off (Account of Mr. Qui) as uncollectible
$1,300.
Dec 31 Wrote off the note received from Newnew Company.
Dec. 31 Prepare adjusting entry to record bad debts expense, assuming bad debts are expected
(estimated) to be 10% of accounts receivable.

Instructions: Prepare the journal entries for the year 2021.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problem 8:
Pepper Co. follows a one-month accounting period and closes its books monthly.
At June 30,2021, the trial balance of Pepper Company contained the following balances:
Accounts Receivable $ 585,000
Allowance for Doubt:fhl Accounts 15,100
Notes Receivable 47,000

The Notes Receivable included the following:

Date Maker Face Term Interest
May 14 Oregano Corp. $28,000 60 days 12%
May 25 Mango Co. $ 19,000 60 days 10%

Interest is computed using a 360-day year. During July 2021, the following transactions were
completed.
July 2 Sold $25,000 of merchandise to Black Company, terms 2/10, n/30.

7 Sold $56,000 of merchandise to Central Company, terms n/15.

8 Collected $450,000 from the accounts receivable balance of previous month with 2% cash
discount allowed.

Received payment in full from Oregano Corp. on the amount due.

17 Collected in full from Black Company and another $20,000 from the balance owed
previously.

20 Received a check for $5,000 from the customer whose account was written off as
uncollectible previously.
20 Sold $120,000 of merchandise to Dragon Company, terms 2/10, n/30.

22 Accepted Central Company's $56,000, 60-day, 9% note for the balance due.

Received notice that the Mango Co. note has been dishonored. Mango Company is not
bankrupt; future payment is anticipated.

31 Collected $50,000 from the accounts balance of Dragon Company.

31 Anna Company's accounts receivable balance of $12,500 is judged to be uncollectible.
31 Adjusted the accrued interest on the notes.

Required:-
(a) Journalize the transactions completed during July and also compute the maturity date of the
notes. Explanations not required. (Decimals must be rounded to whole number).
(b) Enter the balance at July 1 to the accounts receivable and allowance for doubtful accounts
ledgers. Post the journal entries of July to the ledgers.
(c) On July 31, 2021, Pepper Company decided to estimate its bad debts based on I 0% of the
balance of accounts receivable. What is the journal entry to be recorded at July 31, 2021?
a)
Date Account Titles Debit Credit
July 2, 2021

July7

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ACT1600 Fundamentals of Financial Accounting

July 8

17

20

20

22

31

31

31

(b)
Accounts Receivable Allowance for Doubtful Accounts

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ACT1600 Fundamentals of Financial Accounting

(c)

Date Account Titles Debit Credit

...

**********************

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ACT1600 Fundamentals of Financial Accounting

CHAPTER9
PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE
ASSETS
Objective- After studying this chapter, students will be able to:
• Explain the concept of depreciation and how to compute it.
• Distinguish between revenue and capital expenditures and to explain the entries for each.
• Explain how to account for the disposal of plant assets.
• Compute periodic depletion of extractable natural resources.
• Explain the basic issues related to accounting for intangible assets.
• Indicate how plant assets, natural resources, and intangible assets are reported.

Plant Assets
Plant assets are resources that have
+ physical substance (a definite size and shape),
+ are used in the operations of a business,
+ are not intended for sale to customers,
+ are expected to provide service to the company for several years.

Determining cost of plant assets

In general, companies record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for its
intended use.

Plant Assets are classified into Land, Land Improvements, Building and Equipment.

Land
All necessary costs incurred in making land ready for its intended use increase (debit)
the Land account.
Costs typically include:
1) cash purchase price,
2) closing costs such as title and attorney's fees,
3) real estate brokers' commissions,
4) accrued property taxes and other liens assumed by the purchaser, and
5) clearing, leveling, demolishing of existing structures.
6) cost of old building existing on the land and meant for demolition.
7) cost of demolishing the old building.

(Note: The cash received from the sale of scrap of demolished building should be deducted
from the total cost)

Illustration: Liton Company acquires real estate at a cash cost of $2,000,000. The
property contains an old warehouse that is razed at a net cost of $60,000 ($75,000 in
costs less $15,000 proceeds from salvaged materials). Additional expenditures are the
attorney's fee, $10,000, and the real estate broker's commission, $80,000.
Required: Determine the amount to be reported as the cost of the land.

Cost of Land:
Cash price of property $2,000,000
Net removal cost of warehouse 60,000
Attorney's fees 10,000
Real estate broker's commission 80,000
Cost of Land $2,150,000

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ACTl600 Fundamentals of Financial Accounting

Land Improvements
Includes all expenditures necessary to make the improvements ready for their intended
use.
+ Examples: driveways, parking lots, fences, landscaping, and lighting.
+ Limited useful lives.
+ Expense (depreciate) the cost ofland improvements over their useful lives.

Buildings
Includes all costs related directly to purchase or construction.
Purchase costs:
+ Purchase price, closing costs (attorney's fees, title irrsurance, etc.) and real estate
broker's commission.
+ Remodeling and replacing or repairing the roof, floors, electrical wiring, and
plumbing.
Construction costs:
+ Contract price plus payments for architects' fees, building permits, and excavation
costs.
Equipment
Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
+ Cash purchase price.
+ Sales taxes.
+ Freight charges.
+ Insurance during transit paid by the purchaser.
+ Expenditures required in assembling, painting and lettering, installing, and testing
the unit.

(Note: Motor vehicle license and accident insurance policy on company vehicles are recorded as
separate expenses when it incurs. These costs represent annual recurring expenditures.)

Illustration: Lesley Company purchases factory machinery at a cash price of $500,000.

Related expenditures are sales taxes $30,000, insurance during shipping $5,000, and
installation and testing $10,000. Compute the cost of the machinery.

Cost of Machinery
Cash price $500,000
Sales taxes 30,000
Insurance during shipping 5,000
Installation and testing 10,000
$545,000
Journal Entry:
Equipment 545,000
Cash 545,000
Depreciation Methods of Plant Assets (Refer to Chapter 3 for
methods and exercises)
1) Straight- Line Method
2) Units of Activity Method
3) Declining-Balance method

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ACT1600 Fundamentals ofFinancial Accounting

Plant Asset Disposals

There are three ways to dispose of plant assets.
(a) Retirement (no cash received)
(b) Sales
(c) Exchange or trade-in

Sale Retirement Exchange

Equipment is sold Equipment is scrapped Existing eouiome,nt is traded
to another or discarded. for new en11inment

Points to remember;
I. On the date of disposal the book value of the asset must be calculated. So that
accumulated depreciation is up to the date of disposal.
2. On disposal, eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting
the asset account.

a) Retirement of Plant Assets

+ No cash is received.
+ Decrease (debit) Accumulated Depreciation for the full amount of depreciation
taken over the life of the asset
+ Decrease (Credit) the asset account for the original cost of the asset.
+ Record any difference as gain or loss on disposal
Illustration <h Retired at the end of its useful life and the plant asset is without
residual value.
Tele Enterprises retires its computer printer with a cost of $12,000 at the end of its estimated
life. On this date the accumulated depreciation on these printers is $12,000. The company
records the retirement as follows.

Debit Credit
Balance Retired Accumulated depreciation ...... 12,000
12,000 12,000 Equipment. ................... . 12,000
<To record the retirement asset)

Accumulated De rec1atlon
Retired Bal. 12,000
12,000

<2l Retired at end of its useful life and the plant asset has residual value.
Assume that in illustration <ll Tele Enterprise retires its printer which cost $12,000 and has a
residual value of $500 at the end of its estimated life of 5 years. The company records the
retirement of printer as follows:
Debit Credit
Accumulated depreciation <12,000 -500) .............. . 11,500
Loss on retirement of plant asset... ...................... . 500
Equipment... ........................................... .. 12,000

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ACT1600 Fundamentals of Financial Accounting

(3) Retired before the end of its useful life:

Sunset Boulevard Company discards its delivery equipment that cost $18,000 and has
accumulated depreciation as on this date of $14,000. The company records the retirement as
follows:

E ui ment Debit
Balance Retired Accumulated depreciation ......... 14,000
18,000 18,000 Loss on disposal of plant asset... .. 4,000
Equipment. ..................... .. 18,000
<To record the retirement of'asset)
Accumulated De reciation
Retired
14,000

Loss on disposal is reported under "Other income and expense" section of the income
statement.

b) Sale of Plant Assets

Compare the book value of the asset with the proceeds received from the sale.
+If proceeds exceed the book value, on disposal occurs.
+If proceeds are less than the book value, a loss on disposal occurs.
Illustration:(!) Gain on Sale. On July 1, 2018, Magdalena Industry sells its office furniture for
$16,000 cash. The office furniture originally cost $60,000. As of December 31,2017, it had
accumulated depreciation of $41,000. Depreciation for the first six months of 2018 is $8,000.
The company records its depreciation expense and the sale of the office furniture as follows:

Office Furniture Debit Credit

Jan. 1:60,000 Jul 1: Jul. 1 Depreciation expense ............ .. 8,000
Retired Accumulated depreciation .... .. 8,000
60,000 (To record depreciation for 6
months in 20 18)

Accumulated Depreciation Cash ................................. . 16,000

2018: 2017: Accumulated depreciation ......... 49,000
Jul. !: 49,000 Dec. 31:41,000 5,000
Gain on disposal of plant asset
2018 60,000
Jul.!: 8,000 Office furniture .............. .

Computation
Proceeds from sale of plant asset.. ........ . $16,000
Book value (60,000 -49,000) ............ .. 11,000
Gain on disposal of plant asset.. .......... . $5.000

(2)Loss on Sale: Assumed that in illustration (!)above instead of selling the office furniture for
$16,000, Magdalena sells it for $9,000.

Debit Credit
Jul. 1 Depreciation expense ................................... .. 8,000
Accumulated depreciation .......................... .. 8,000
<To update the depreciation account)

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ACT1600 Fundamentals of Financial Accounting

Recording the sale:

Cash ........................................................ . 9,000
Accumulated depreciation ............................... . 49,000
Loss on disposal of plant asset.. ........................ . 2,000
Office furniture ....................................... .. 60,000

c) Exchange or Trade-In of Plant Assets

+ Ordinarily, companies record a gain or loss on the exchange of plant assets.
+ Most exchanges have commercial substance.
+ Commercial substance- if the future cash flows change as a result of the exchange.

<ll Exchange at a Loss. On January 1, Binan Company exchanged its used trucks for new truck.
The used trucks have a combined book value of $42,000 rcost $64,000 less $22,000
accumulated depreciation). Binan Company received a $26,000 fair market value on its used
trucks and Binan Company paid additional cash of $17,000 for the exchange.

Debit Credit Computation:

rNew)Truck (26,000 + 17,000) 43,000 Cost of used truck ... 64,000
Accumulated depreciation ........ 22,000 Accumulated depreciation r22,000l
Loss on disposal of plant asset 16,000 Book value ... 42,000
rOldl Truck. ..................... 64,000 FMV of used truck ... 26,000
Cash ................................ 17,000 Loss on disposal... UillQQ

r2l Exchange at a gain. Mabal Express Delivery trades its old delivery equipment (cost $40,000
and $28,000 accumulated depreciation on this date) for new delivery equipment. The old
equipment had a fair market value of $19,000. Mabal also paid $3,000 cash.

Debit Credit
<NewJEquipment (19,000 +3,000J 22,000
Accumulated depreciation ............ . 28,000
Gain on disposal of plant asset.. .. 7,000
<Oldl Equipment.. ................. . 40,000
Cash ................................ .. 3,000

EXTRACTABLE NATURAL RESOURCES

Natural resources consist of standing timber and resources extracted from the ground, such as oil,
gas, and minerals.
IFRS defines extractive industries as those businesses involved in finding and removing natural
resources located in or near the earth•s cru
Acquisition cost of an extractable natural resource is the
+ price needed to acquire the resource and
+ prepare it for its intended use.
Depletion-allocation of the cost to expense in a rational and systematic manner over the
resource•s useful life.
+Depletion is to nah1ral resources as depreciation is to plant assets.
+ Companies generally use units-of-activity method.
+Depletion generally is a function of the units extracted

Determining Cost of Natural Resources

Illustration: Power Coal Company invests $50 million in a mine estimated to have 10 million
tons of coal and no residual value. In the first year, Power extracts and sells 800,000 tons of coal.
Power computes the depletion expense as follows:
$50,000,000 -:- 10,000,000 = $5 depletion cost per ton
$5 x 800,000 = $4,000,000 annual depletion expense

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ACT1600 Fundamentals of Financial Accounting

Journal entry:
Depletion expense 4,000,000
Accumulated depletion 4,000,000
(Note: Extracted resources that have not been sold are reported as inventory in the current
assets section.
INTANGIBLE ASSETS
Intangible assets are rights, privileges, and competitive advantages that result from ownership of
long-lived assets that do not possess physical substance.
Intangibles have limited life or indefinite life.
Common types of intangibles:
•!• Patents
• Exclusive right issued by the patent office that enables the recipient to manufacture, sell,
or otherwise control an invention for a specified number of years from the date of grant.
Legal life in many countries is 20 years.
• The initial cost of a patent is the cash or cash equivalent price paid to acquire the patent.
• Costs of patent is amortized over its 20-year life or its useful life, whichever is shorter.
• Legal fees incurred in successfully defending a patent are added to Patent account and
amortized over the remaining life of patent.

•!• Copyrights
• Government grants copyrights, which give the owner the exclusive right to reproduce and
sell an artistic or published work.
• Cost of a copyright is the cost of acquiring and defending it.
• Amortized to expense over useful life .

•!• Trademarks and Trade Names

• Word, phrase, jingle, or symbol that identifies a particular enterprise or product.
Wheaties, Kleenex, Windows, Coca-Cola, and Jeep.
• Trademark or trade name have indefinite life, therefore they are not amortized .
• If a company purchases the trademark or trade name, its cost is the purchase price .
• If a company develops and maintains the trademark or trade name, any costs related to
these activities are expensed as incurred

•!• Franchises or licenses

• Contractual arrangement between a franchisor and a franchisee. The franchisor grants the
franchisee the right to sell certain products ,provide specific services, or use certain trade
marks or trade names, usually within a designated geographical area.
Shell, KFC, Star Bucks, Me. Donalds, 7-Eleven are franchises.

License is another type of franchise that is entered into between a governmental body
(municipalities) and a company. Permits company to use public property in performing
its services.
(Use of city streets for a bus line/ taxi service. Use public land for telephone and electric
lines. Use of airwaves for radio or TV broadcasting)
• Franchise (or license) with a limited life should be amortized to expense over the life of
the franchise.
• Franchise with an indefinite life should be carried at cost and not amortized.

•!• Goodwill
• Includes exceptional management, desirable location, good customer relations, skilled
employees, high-quality products, etc.
• Goodwill is not amortized because of its indefinite life

Limited-Life Intangibles:
+
Journal entry for amortization (Straight-Line method)
Amortization expense..................... xx
Intangible asset account . . .... xx

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ACT 1600 Fundamentals of Financial Accounting

Indefinite-Life Intangibles:
+No amortization.
+ Companies classify Amortization Expense as an operating expense in the income
statement.
+ Illustration: American Labs purchases a patent at a cost of $720,000. American estimates
the useful life of the patent to be eight years. American records the annual amortization for
the year ended on December 31 as follows.
Cost $720,000
Useful life ..;- 8 years
Annual expense $90,000

Journal Entry:
Dec. 31 Amortization expense 90,000
Patent 90,000

Statement of Financial Position Presentation

<Hypothetical Figures)

Assets:

Property, plant, and equipment

Land ...................................................................... 900
Building ................................................................. $7,000
Less accumulated depreciation-building ............................. 1,200 5,800
Machinery and equipment. ............................................ $30,000
Less accumulated depreciation-machinery and equipment... .... 16,800 13,200
Total property, plant, and equipment... ........................... $19,900
Goodwill and intangibles:
Goodwill ................................................................. $59,700
Trademarks and other intangible assets ............................. 34,300
Total goodwill and intangible assets .............................. 94,000
Total assets $113 900

Depreciation, Depletion, and Amortization Illustration

Allocation Methods of Allocation
Plant Assets:
Land mot subject for any depreciation)
Building } Dr. Depreciation expenses Straight-line
Equipment Cr. Accumulated depreciation } Double-declining-balance
Land Improvement Units-of-Activity

Natural Resources:

}
Iron ore deposits
Petroleum (oib deposits
Timber
Precious stones deposit
Dr. Depletion expense
Cr. Accumulated depletion
} Units-of-Activity

Etc.

Intangible:
Goodwill (indefinite life a,nd therefore not subject for any amortiza iom
Patent
Copyright Dr. Amortization expense Straight-line
Franchise Cr. Intangible
Trademark

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ACT1600 Fundamentals ofFinancial Accounting

EXERCISES
Exercise: 1
On January 1, 2020, Brisbane Company purchased a delivery truck at a cash price of $420,000.
Related expenditures are sales taxes $13,200, painting and lettering $5,000, motor vehicle license
$800, and a three-year accident insurance policy $16,000.
Instructions:
a) Compute the cost of the delivery truck.
b) Prepare the journal entry to record these costs.
(a)

(b)
Date Account Title Debit Credit

Exercise: 2
On July 1, 2020, San Pedro Company acquires real estate at a cash price of $1,500,000. An old
warehouse on the property was demolished at a cost of $15,000. Salvage materials from the
demolished warehouse was sold for $2,000 cash. Attorney·s fee of $15,000 and real estate
commission of $82,000 were paid in relation to the acquisition of the property. Construction of
parkway and parking space was completed on July 30, at a total of $20,000.
Instructions:
a) Determine the cost of land.
b) Prepare the journal entry to record the cost of land and land improvements.
(a)

Date Account Title Debit Credit

Exercise:3
On Novemberl, 2020, Sugar Company acquired real estate on which it planned to construct a
small office building. The company paid $80,000 in cash. An old warehouse on the property was
razed at a cost of $9,400, the salvaged materials were sold for $1,700. Additional expenditures
before construction began included $1,100 attorneY's fees, $5,000 real estate brokers fee, $7,800
architect·s fee and $12,700 to put in driveways and parking lot.
Instructions
a) Determine the amount to be reported as the cost of the land.
b) For each cost not used in part(a), indicate the account to be debited.

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ACT1600 Fundamentals of Financial Accounting

(a)

(b)

Exercise:4
Rambo Company incurs the following expenditures in purchasing a truck: cash price $30,000,
accident insurance $2,000, sales taxes $1,800, motor vehicle license $160 and painting and
lettering $400. What is the cost of the truck?

Exercise: 5
On January 1, Calamba Company purchased factory machinery at a cash price of $620,000.
Included in the purchase were sales taxes of $30,000, insurance during shipping $5,000, and
installation and testing $10,000. What is the cost of the machinery?

Exercise: 6
Ewan Company has a machine that was recorded at a cost of $60,000 and accumulated
depreciation of $50,000 as of December 31, 2021. On this date the machine was scrapped.
Required: Record the scrapped machine of Ewan Company on December 31, 2021.

Date Account Title Debit Credit

Exercise: 7
On February 1, 2021, Benguet Coal Mine Company invests $70 million in a mine estimated to
have 10 million tons of coal. It is estimated that after all its coal had been mined, the mining land
will have a residual value of $1,000,000. During its first year of operation 900,000 tons of coal
was extracted and sold.
Instructions
a) Prepare the journal entry for purchase of the Coal mine.
b) Prepare the journal entry to record the depletion expense at the end of the first year.

Date Account Title Debit Credit

(a)

(b)

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ACTl600 Fundamentals of Financial Accounting

Exercise:S
Erin Danielle Company purchased equipment and incurred the following costs:

Cash price ....................................................... . $24,000

Sales taxes .............................................. . 1,200
Insurance during transit.. ............................ . 200
Installation and testing .............................. .. 400
Parts replaced due to accident during installation 50
Total costs ........................................... .

Determine the total cost of equipment purchased and record the purchase.

Exercise: 9
Prepare journal entries to record the following transactions on January 1, 2021:
a) Canberra Company retires its delivery equipment, which cost $75,000. Accumulated
depreciation is also $75,000 on this delivery equipment. No residual value is received.
b) Assume same information as in (a), except that accumulated depreciation is $ 70,000, on
the delivery equipment.
Date Account Title Debit Credit
(a)

(b)

Exercise: 10
China Company sells equipment on September 30, 2021, for $20,000 cash. The equipment
originally cost $72,000 and as of January 1, 2021, had accumulated depreciation of $42,000.
Depreciation for the first 9 months of 2021 is $4,800. Prepare the journal entries to (a) update
depreciation to September 30, 2021, and (b)fecord the sale of the equipment.
Date Account Title Debit Credit
(a)

(b)

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ACTI600 Fundamentals ofFinancial Accounting

Exercise: 11
Aroma Company exchanges old office equipment for new office equipment on January 1, 2021.
The book value of the old office equipment is $33,000 (cost $61,000 less accumulated
depreciation $28,000J. Its fair value is $19,000, and cash of $5,000 is paid. Prepare the entry to
record the exchange.

Date Account Title Debit Credit

Exercise: 12
Maggie Company expects to extract 20 million tons of coal from a mine that cost $12,000,000. If
no residual value is expected and 2 million tons are mined and sold in the first year, record the
journal entry for depletion expense on December 31,2021.
I Date I Account Title IDebit IC"dit

Exercise: 13
On December 31,2021, Fisher Company trades old equipment <cost $90,000 less $54,000
accumulated depreciation) for new equipment. Fisher paid $36,000 cash in the trade. The old
equipment that was traded had a fair value of $44,000. Prepare the entry to record the exchange
of assets by Fisher Company.

Date Account Title Debit Credit

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ACT1600 Fundamentals ofFinancial Accounting

PROBLEMS
Problem I
Modem Company was organized on January I. During the first year of operations, the following
plant asset expenditures and receipts were recorded in random order.
Debit
1. Cost of filling and grading the land $6,000
2. Full payment to building contractor 780,000
3. Real estate taxes on land paid for the current year 5,000
4. Cost of real estate purchased as a plant site dand $100,000 and building $45,000) 145,000
5. Excavation costs for new building 35,000
6. Architect's fees on building plans 10,000
7. Accrued real estate taxes paid at time of purchase of real estate 2,000
8. Cost of parking lots and driveways 14,000
9. Cost of demolishing building to make land suitable for construction of
new building 15,000
Credit
10. Proceeds from salvage of demolished building 3,600

Instructions
Analyze the transactions using the following column headings. For amounts entered in the Other
Accounts column, also indicate the account titles.

Item Land Building Other Accounts

Problem 2:
Gevarra Incorporated has the following expenditures relating to its plant during June 2019.

1. Purchased a plant site for $120,000 cash <land $110,000 with an old building $10,000J.The
old building was razed at a cost of$6,000 and the salvaged materials were sold for $1,500.
2. Paid $2,000 as real estate tax for the current year on the land purchased.
3. Purchased a specially equipped truck from Japan at a cost of $90,000 FOB shipping. Paid the
shipping cost of $1,500 including insurance of $200.
4. Paid $2,000 for one year accident insurance in advance for the new truck.
5. Paid for landscaping on land, parking lots and drive ways construction on new plant site
$22,000.
6. Paid $500 for motor vehicle license fee to drive the truck.
7. Paid $800 in advance to architect for design of new building.

Required -Record the transactions in Gevarra Inc. journal.

Date Account Title Debit Credit

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ACT1600 Fundamentals ofFinancial Accounting

Problem 3:
Presented below are selected transactions at Ingles Company for 2021. The company closes its
accounting book at year end December 31.
Jan. 1 Retired a piece of machinery that was purchased on January 1, 2011. The
machine cost $60,000 on that date. It had a useful life of 10 years and a residual
value of $2,000. It was depreciated using straight-line method.
June 30 Sold a computer that was purchased on July 1, 2018. The computer cost $40,000.
It has a useful life of 5 years and residual value of $5,000. The computer was
sold for $18,000. The computer is depreciated using double -declining balance
method and has accumulated depreciation of$28,480 as on January 1, 2021.
Dec. 31 The company traded-in its delivery truck for a new delivery truck that has a cost
of $50,000. The company was given a trade-in allowance on its truck of $2,000.
The truck was purchased on January 1, 2017 at a cost of$33,000. The truck has
an estimated residual value of $3,000 after driven for an estimated 60,000
kilometers. On this date the truck was driven for total of 55,000 kilometers
including 4,500 kilometers during 2021.
Required:
Journalize all entries required on the above dates, including entries to update depreciation,
where applicable, on assets disposed on. Depreciation is up to date as of December 31, 2020.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problem 4:
Mandela Company organized in 2021, has the following transactions related to intangible assets.
Jan. 2 Purchased patent <8-year life)....................................... $560,000
Apr. I Goodwill purchased (indefinite life)............................... 360,000
Jul. I 10-year franchise; expiration date July 1, 2031.................. 440,000
Sept. 1 Research cost.......................................................... 223,000
Nov. 1 Development costs incurred prior to technological feasibility 225,000

Required:
Prepare the necessary entries to record these intangibles. All costs"incurred were for cash. Make
the adjusting entries as of December 31, 2021, recording any necessary amortization.

Date Account Title Debit Credit

"

Problem 5:
Mercury Drugs purchased a patent for cash at a cost of$700,000 on January 3, 2021.
AttorneY's fee of$20,000 was paid in connection with the purchase of the patent. The patent
has a remaining legal life of 10 years but Mercury Drugs estimates the useful life of the patent
to be eight years.
Instructions
a) Prepare the journal entry to record the purchase of patent.
b) Prepare the adjusting entry to record the amortization of patent as on December31, 2021.

Date Account Title Debit Credit

Problem 6:
1. On July 4, 2021, Wyoming Mining Company purchased the mineral rights to a granite
deposit for $1,600,000. It is estimated that the recoverable granite will be 400,000 tons.
During 2021, 100,000 tons of granite was extracted and 60,000 tons were sold. Record the
journal entry to record depletion expense.

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ACT1600 Fundamentals ofFinancial Accounting

2. Henson Company incurred $600,000 of research costs in its laboratory to develop a new
product. It spent $80,000 in legal fees for a patent granted on January 2, 2021. On July 31,
2021, Henson paid $60,000 for legal fees in a successful defense of the patent. Record the
journal entry to record the cost of patents assuming cash was paid.
Date Account Title Debit Credit
1)

2)

Problem 7:
The equipment of Farmhouse Products was depreciated using straight-line method at an
estimated l 0 years useful life with no residual value. On September 30, 2021, the equipment was
sold for $7,300 cash. Ledger balances of the equipment and its accumulated depreciation is
shown below.

Equipment Accumulated Depreciation . Equipment

Jan. I, 2017 10,000 Dec. 31, 2017 1,000
Dec. 31, 2018 1,000
Dec. 31, 2019 1,000
Dec. 31, 2020 1,000
Sept. 30, 2021 ?

Required -update the accumulated depreciation on the date of sales and record the sales of the
equipment.
Date Account Title Debit Credit

Problem 8:
Assume Farmhouse Products has an old delivery truck that was recorded at a cost of $9,000.
Farmhouse uses double-declining balance method to depreciate the old delivery truck, with an
estimated useful life of 5 years, and a residual value of $1,000. On December 31, 2020, the old
truck has accumulated depreciation of $6,408. On October 31, 2021, Farmhouse trades in its old
delivery truck with a new one with a fair market value of $15,000 and also pays cash of $10,000.
Required: Update the accumulated depreciation on the date of trade-in and record the
trade in of the equipment.

Date Account Title Debit Credit

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ACT1600 Fundamentals ofFinancial Accounting

Problem 9:
Presented below are selected transactions for Corbin Company for 2021.
Jan.l Retired a machine that was purchased on January 1, 201 L The machine cost $90,000
on that date, and had a useful life of 10 years with no residual value.
April.30 Sold equipment for $31,000 that was purchased on January 1, 2018. The equipment
cost $90,000, and had a useful life of 5 years with no residual value.
<First, write the entry to update depreciation and then the entry to record the sale).
Dec.31 Discarded a business automobile that was purchased on April 1, 2017. The car cost
$42,000 and was depreciated on a 5-year useful life with a residual value of $2,000.
(Use automobile as account name)
<First, write the entry to update depreciation and then the entry to record the discard).
Instructions:
Journalize all entries required as a result of the above transactions including updating
depreciation on April 30 and Dec 3 L Corbin Company uses the straight-line method of
depreciation and has recorded depreciation through December 31, 2020.

Date Account Title Debit Credit

****************************

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ACT 1600 Fundamentals of Financial Accounting

CHAPTER 10
SPECIAL JOURNALS
Objectives: After studying this chapter, you should be able to:
. Explain what special journals are
. Explain the different types of special journals
. Explain how to record transactions in special journals
. Explain the recording ofVAT

1. Sales Journal- All sales of merchandise on account.

2. Purchase Journal- All purchase of merchandise on account.
3. Cash Receipts Journal- All receipts of cash
4. Cash Payments Journal- All payments of cash

Any transaction which cannot be recorded in the above 4 journals are recorded in the General
Journal. Ex: Sales Returns & Allowance on account, correction entries, closing entries, adjusting
entries.

Value Added Tax <VAT)

Value Added Tax (VAT) has been implemented in Thailand since 1992 replacing Business Tax
(BT). VAT is an indirect tax imposed on the value added of each stage of production and
distribution. Currently, the tax rate is 7 percent.

Taxable person
);> Any person or entity who regularly supplies goods or provides services in Thailand and
has an annual turnover exceeding 1.8 million baht is subject to VAT in Thailand. Service
is deemed to be provided in Thailand if the service is performed in Thailand regardless
where it is utilized or if it is performed elsewhere and utilized in Thailand.

);> An importer is also subject to VAT in Thailand no matter whether one is a registered
person or not. VAT will be collected by the Customs Department at the time goods are
imported. Certain businesses are excluded from VAT and will instead be subjected to
Specific Business Tax (SBT). Under VAT, taxable goods mean all types of property,
tangible or intangible, whether they are available for sales, for own use, or for any other
purposes. It also includes any types of articles imported into Thailand. Services refer to
any activities conducted for the benefits of a person or an entity, which are not the supply
in terms of goods.

YAT calculation
VAT liability (Net VAT Payable) Output Tax (VAT on Sales) - Input Tax (VAT on
Purchases)

Output tax is the VAT that is calculated and charged on the sale of goods and services from the
business, if the business is VAT -registered. (Annual revenue equal to or exceeding 1,800,000
baht)

Input tax is the tax paid on purchases by a registered dealer in course of its business. When a
dealer that is registered for value added tax (VA I) buys goods or services from another
supplier, VAT is charged as a percentage of the purchase cost. This is known as Input tax.

Certain activities are exempted from VAT, such as:

• Certain basic services such as transportation; domestic and international transportation
• Health Care Services
• Educational Services
*There is no VAT on wages and salaries as withholding tax is applicable. A withholding tax is
an income tax to be paid to the government by the payer of the income rather than by the
recipient of the income.

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 ACT 1600 Fundamentals of Financial Accounting

Examples:
1) On January 1, 2019, purchased merchandise from Abazi Company $2,000, term n/45.
VAT of 7% is applicable.

January 1: Inventory I Purchase 2,000

Input Tax (VAT on Purchase) 140
Accounts Payable 2,140

2) On January 3, 2019, sold merchandise to Miya Company for $3,500, term n/30. VAT of
7% is applicable.
January 3: Accounts Receivable 3,745
Sales Revenue 3,500
Output Tax (VAT on Sales) 245

How a Value-Added Tax Works

In a country with a value-added tax, businesses collect the tax on their sales and pay It on their purchases
from other businesses. Here's how a 10% VAT would apply to the production and sale of a shirt.

Farmer grows Textile maker Clothes maker Clothing retailer

cotton and sells makes fabric and sews shirt and sells shirt to
to textile maker sells to clothes sells to retailer consumer
for$1.00 maker for $5.00 for$12.00 for$20.00

Sale price with VAT $Ll0 $5.50 $13.20 $22.00

VAT collected by seller $0.10 ------: 50.50 ------. $1.20 ------. $2.00

Credit for VAT paid In N.A. L ___ ,. -$0.10 ! ____ .. -$0.50 l ____ .,. -$120
previous stage

Net VAT collected $0.10 + $0.40 + $0.70 + $0.80

Total VAT collected

...
$2.00

Journal entries (Perpetual Inventory System- Including VAT entries)

I. Sale of on account. 2. Sale of merchandise for cash.
( Sales Journal) (Cash Receipts Journal)
Accounts Receivable XX Cash XX
Sales Revenue XX Sales Revenue XX
Output Tax XX Output Tax XX

Cost of Goods Sold XX Cost of Goods Sold XX

Inventory XX Inventory XX
3. Sales Returns on account 4. Sales Returns for cash
( General Journal) (Cash Payments Journal)
Sales Returns & Allowance XX Sales Returns & Allowance XX
Output Tax XX Output Tax XX
Accounts Receivable XX Cash XX
Inventory XX Inventory XX
Cost of Goods Sold XX Cost of Goods Sold XX

5. Purchase of merchandise on account 6. Purchase of merchandise for cash

(Purchase Journal) (Cash Payments Journal)
Inventory XX Inventory XX
Input Tax XX Input Tax XX
Accounts Payable XX Cash XX

7. Purchase Return on account 8. Purchase Returns for cash

( General Journal) (Cash Receipts Journal)
Accounts Payable XX Cash XX
Inventory XX Inventory XX
Input Tax XX Input Tax XX

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 ACT 1600 Fundamentals of Financial Accounting

Problem: 1
Selected accounts from the chart of accounts of Litke Company are shown below:
101 Cash 201 Accounts Payable
112 Accounts Receivable 209 Output Tax
120 Inventory 401 Sales Revenue
126 Supplies 414 Sales Discounts
128 Input Tax 505 Cost of Goods Sold
610 Advertising Expense
The cost of all merchandise sold was 70% of the sales price. During October, Litke Co
completed the following transactions. VAT of7% is applicable.
Oct 2: Purchased merchandise from Camacho Company, $16,500, term n/30.
4: Sold merchandise to Enos Company, $7,700, term n/30, Invoice no.204.
7: Made cash sales for the week totaling $9,160.
9: Paid in full the amount owed to Camacho Company, check no. 1124.
10: Purchased merchandise from Finn Corporation. $3,500, term n/60.
12: Received payment from Enos Company for invoice no. 204.
13: Returned $210 worth of damaged goods purchased on account from Finn Corporation on Oct
10.
14: Made cash sales for the week totaling $8,180.
17: Sold merchandise to G.Richter & Co $5,350, term n/30, invoice no.205.
18: Purchased merchandise for cash $2,500, check no.ll25.
23: Paid in full the amount owed to Finn Corporation, check no.ll26.
25: Purchased supplies on account from Robinson Company. $260.
25: Received payment from G.Richter & Co for invoice no. 205.
30: Paid advertising bill for the month from the Gazette, $400, check no. 1127.

Instruction: Journalize the above transactions in the special journals and general journal.

Problem 1· SALES JOURNAL Sl

Date Account Invoice Ref AIR Dr. Sales Output Tax Cost of Goods Sold Dr.
Debited No. revenue Cr Inventory Cr.
Cr

PURCHASE JOURNAL Pl
Date Account Credited Terms Ref Inventory Input AlP Cr.
Dr. Tax Dr.

CASH RECEIPTS JOURNAL CRl

Date Account Credited Ref Cash AIR Sales Output Other Cost of Goods
Dr. Cr. Revenue Tax Accounts Sold Dr.
Cr. Cr. Cr. Inventory Cr.

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 ACT 1600 Fundamentals of Financial Accounting

CASH PAYMENTS JOURNAL CP 1

Date Chk Account Debited Ref Other AlP Input Tax Cash
No. Accounts Dr. Dr. Cr.
Dr.

GENERAL JOURNAL p age

Date Account Title Ref Debit Credit

"

Problem 2:
The selected accounts of Boyden Co are shown below:
101 Cash 202 Notes Payable
112 Accounts Receivable 203 Output Tax
120 Inventory 401 Sales Revenue
126 Supplies 412 Sales Returns and Allowance
127 Input Tax 414 Sales Discounts
201 Accounts Payable 505 Cost of Goods Sold
726 Salaries Expense
The cost of all merchandise sold was 60% of the sales price. During January, Boyden Co
completed the following transactions. VAT of7% is applicable
Jan 3: Purchased merchandise from Wortham Co $10,000, terms n/60.
4: Sold merchandise to Milam $5,250, invoice no.371, terms n/30.
5: Returned $300 worth of damaged goods purchased on account from Wortham Co.
6: Sold merchandise for cash, totaling $3,150.
7: Purchased supplies on account $1,200.
8: Purchased merchandise from Noyes Co $4,500, terms n/60.
9: Sold merchandise to Connor Corp $6,400, invoice no. 372 terms n/30.
11: Purchased merchandise from Betz Co. $3,700, terms n/30.
13: Paid in full to Wortham Co, by issuing check no. 1012.
13: Made cash sales for the week totaling $6,260.
15: Received payment from Connor Corp for invoice no. 372.
17: Received payment from Milam for invoice no. 371.
17: Sold merchandise to Bullock Co $1,200, invoice no.373, terms n/30.
18: Purchased merchandise for cash $5,000, check no.l013.
20: Cash sales for the week totaled $3,200.
20: Paid the amount due to Noyes Co; check no. 1014.
23: Purchased merchandise from Mentos Co $7,800, terms n/60.
24: Purchased merchandise from Forgetta Corp. $5,100, terms n/45.
27: Sold merchandise for cash, totaling $4,230.
30: Received payment from Bullock Co. for invoice no. 373.
31: Paid salaries to employees $13,200; check no. 1015.
31: Sold merchandise to Milam Co $9,330, invoice no.374, terms n/30.
31: Borrowed $10,000 from National Bank by signing a 6-months,9%, note-payable.

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 ACT 1600 Fundamentals of Financial Accounting

Instructions: Prepare Special journals and General Journal.

Problem· 2 SALES JOURNAL Sl
Date Account Invoice Ref AIR Sales Output Cost of Goods Sold
Debited No. Dr. Revenue Tax Dr.
Cr. Cr. Inventory Cr.

PURCHASE JOURNAL PI
Date Account Credited Terms Ref Inventory Input Tax AlP
Dr. Dr. Cr.

CASH RECEIPTS JOURNAL CR 1

Date Account Credited Ref Cash AIR Sales Output Other Cost of goods sold
Dr. Cr. Revenue Tax Accounts Dr.
Cr. Cr. Cr. Inventory Cr

CASHPAYMENTSJOURNAL CPl
Date Check Account Debited Ref Other AlP Input Tax Cash
No. Accounts Dr. Dr. Cr.
Dr.

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 ACT 1600 Fundamentals of Financial Accounting

GENERAL JOURNAL p age

Date Account Title Ref Debit Credit

Problem 3:
Selected accounts from the chart of accounts of Yamasu Company are shown below:
101 Cash 201 Accounts Payable
112 Accounts Receivable 208 Output Tax
120 Inventory 401 Sales Revenue
125 Supplies 416 Sales Returns and Allowances
130 Prepaid Insurance 501 C9st of Goods Sold
137 Input Tax 615 Utilities Expense
The cost of all merchandise sold was 60% of sales price. During November, Yamasu Company
completed the following transactions. VAT of7% is applicable.
Nov 2 Purchased merchandise from Fenanza Company $16,000, term n/60.
4 Purchased supplies for $1,500 and issued check, no.126 for the same amount.
5 Sold merchandise to Kaki Company for $9,500, term n/30, invoice no. 311.
6 Returned $1,000 of damaged goods purchased on account from Fenanza Company on Nov
2.
8 Purchased merchandise from Ziza Company $14,000, term n/30.
9 Made cash sales of merchandise totaling $6,500.
10 Granted allowance to Kaki Company for the damaged merchandise $500.
10 Paid $1,200 for a one-year insurance policy, check no.213.
12 Paid in full the amount owed to Fenanza Company, check no. 221.
15 Received payment from Kaki Company for invoice no. 311.
16 Sold merchandise to Loyard Company for $18,000, term n/30, invoice no. 312.
20 Purchase merchandise for cash $6,000, check no. 222
23 Paid in full the amount owed to Ziza Company, check no. 231.
27 Received payment from Loyard Company for invoice no.312.
29 Sold merchandise to Holist Company $20,000, term n/30, invoice no. 313.
30 Paid the utilities bill of$9,000 for the current month, check no. 234.

Instruction: Journalize the transactions in the special journals and general journal.

Problem
SALES JOURNAL S1
Date Account Invoice Ref AIR Sales Output Tax Cost of Goods Sold
Debited No. Dr. revenue Cr Dr.
Cr Inventory Cr.

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 ACT 1600 Fundamentals of Financial Accounting

PURCHASE JOURNAL PI
Date Account Credited Terms Ref Inventory Dr. Input Tax AlP
Dr. Cr.

CASH RECEIPTS JOURNAL CRI

Date Account Credited Ref Cash AIR Sales Output Other Cost of Goods
Dr. Cr. Revenue Tax Accounts Sold Dr.
Cr. Cr. Cr. Inventory Cr.

CASH PAYMENTS JOURNAL CP I

Date Chk Account Debited Ref Other AlP Input Cash
No. Accounts Dr. Tax Dr. Cr.
Dr.

GENERAL JOURNAL p age

Date Account Title Ref Debit Credit

Problem 4:
The following are selected accounts from the books of Westin Co:
101 Cash 202 Notes Payable
112 Accounts Receivable 203 Output Tax
120 Inventory 401 Sales
126 Equipment 412 Sales Returns and Allowance
127 Input Tax 414 Sales Discounts
201 Accounts Payable 505 Cost of goods sold
726 Utility Expense
The cost of all merchandise sold was 70% of the sales price. During May, Westin Co completed
the following transactions. VAT of7% is applicable.
May 1: Purchased merchandise from Madrid Inc. $8,000, terms, n/30.
2: Sold merchandise to Data Co $4,000, terms, n/30, invoice No.101.
5: Received credit from Madrid Inc. for merchandise returned $600.
6: Granted allowance to Data Co. for the defective goods, $400.
9: Received collections in full from Data Co for the sales on May 2.

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 ACT 1600 Fundamentals ofFinancial Accounting

I 0: Paid Madrid Inc. in full, check no. 0062.

II: Purchased an equipment on account $4,500.
12: Purchased merchandise for cash$ 4,600, check no.0063.
17: Purchased merchandise from Kellogg Co $2,500, FOB shipping point, terms, nl45.
18: Paid freight on May 17 purchase; $500, check no. 0064.
21: Sold merchandise for cash $6,200.
22: Sold merchandise to Hoover Inc. $1,000, terms, n/60, invoice No.1 02.
27: Paid Kellogg Co in full, check no. 0065.
30: Received payment from Hoover Inc. for invoice no. I 02.
30: Incurred utility expense for the month to be paid on June I, $2,000.
31: Sold merchandise for cash $3,800.
Instruction: Journalize the above transactions in the special journals and general journal.

Problem 4:
SALES JOURNAL SI
Date Account Invoice Ref AIR Sales Output Cost of Goods Sold
Debited No. Dr. Revenue Tax Dr.
Cr. Cr. Cr.

PURCHASE JOURNAL P1
Date Account Credited Terms Ref Inventory Input Tax AlP
Dr. Dr. Cr.

CASH RECEIPTS JOURNAL CR 1

Date Account Credited Ref Cash AIR Sales Output Other Cost of Goods Sold
Dr. Cr. Revenue Tax Accounts Dr.
Cr. Cr. Cr. Inventory Cr

CASH PAYMENTS JOURNAL CP1

Date Check Account Debited Ref Other AlP Input Tax Cash
No. Accounts Dr. Dr. Cr.
Dr.

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 ACT 1600 Fundamentals of Financial Accounting

GENERAL JOURNAL p age

Date Account Title Ref Debit Credit

******************************

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ACT1600 Fundamentals of Financial Accounting

CHAPTERll
LIABILITIES
Study Objectives:
After studying this chapter, you should be able to:
• Explain why bonds are issued.
• Prepare the entries for issuance of bonds and interest expense.
• Describe the entries for issuance of bonds at face value, at discount and at premium.
• Describe the entries when bonds are redeemed.
• Identify the methods for the presentation and analysis of non-current liabilities.

Bond Basics:
•!• Bonds are a form of interest-bearing notes payable.
•!• Bonds are issued by a company to obtain large amounts oflong term capital.
•!• The company must repay such borrowing after few years, so bonds payable is the long-
term liability of a corporation.
•!• The company must pay interest on bonds payable at regular intervals, until the repayment
(retirement) of the bonds payable.
•!• Maturity date is the last date on which the company should repay the bonds payable.
•!• The company is free to repay or retire the bonds on any date before the maturity date.

Issuing Procedures:
•!• In authorizing the bond issue - the board of directors must stipulate
I. the total number of bonds to be authorized, total face value, and
2. the contractual interest rate
The company pays interest to the investors on a periodic basis.
• The face value is the amount of principal the issuing company must pay at the
maturity date.
• The maturity date is the date that the final payment is due to the investor from the
issuing company.
• The contractual interest rate, often referred to as the stated rate, is the rate used to
determine the amount of cash interest the borrower pays and the investor receives.
• Usually, the contractual rate is stated as an annual rate. Interest is generally paid
semiannually.
• The terms of the bond issue are set forth in a legal document called a bond
indenture.
• The indenture shows the terms and summarizes the rights of the bondholders and
their trustees and the obligations of the issuing company.
• The trustee keeps records of each bondholder.
• The issuing company arranges for the printing of bond certificates. The indenture and
the certificate are separate documents

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ACT1600 Fundamentals ofFinancial Accounting

Bond Trading
• Bondholders have the opportunity to convert their holdings into cash at any time by
selling the bonds at the current market price on national securities exchanges.
• Bond prices are quoted as a percentage of the face value of the bond, which is usually
$1,000. Thus, a $1,000 bond with a quoted price of97 means that the selling price of
the bond is 97% of face value, or $970.
• A corporation makes journal entries only when it issues or buys back bonds or when
bondholders exchange convertible bonds into ordinary shares.

Determining the market price of bonds:

Market value is a function of the three factors that determine present value:
I. dollar amounts to be received,
2. length of time until the amounts are received, and
3. market rate of interest
• the rate investor demand for loaning fund to the cooperation
• The rate changes daily depending on type of bond, current industry
conditions and the company's performance.

Accounting fol." Bond Issues:

• A Corporation records bond transaction when it issues (sells) or retires (buys back) bonds
and when bondholders convert bonds into ordinary shares.
• Bonds may be issued at face value, below face value (discount), or above face value
(premium).

Assume Contractual Interest Rate is 10%

Market Interest Bonds sold at

8% Premium (scllatapric<!
higher than filCC\':lluc)

10% Face Value

12% Discount (sc!latapricc
lower than race value)

1. Issuing Bonds at Face Value

Illustration: On January 1, 2020, Berlin Corporation issues $IOO,OOO, five-year, 10% bonds at
100 (100% of face value). The entry to record the sale is:
Jan. I Cash 100,000
Bonds Payable 100,000
Bonds Payable is recorded in the non-current liabilities section of the statement of financial
position because the maturity date is January I, 2023.
Assume that interest is payable semiannually on January I and July 1. Prepare the entry to
record the payment of interest on July 1, 2020, assume no previous accrual.

July I Interest Expense 5,000

Cash 5,000
Prepare the entry to record the accrual of interest on December 31, 2020, assume no previous
accrual.
Dec. 3I Interest Expense 5,000
Interest Payable 5,000

Interest Payable is recorded as a current liability since payment is done within the next year.
Berlin records the payment on January 1, 2021 as follows.
Jan 1 Interest Payable 5,000
Cash 5,000

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ACT1600 Fundamentals of Financial Accounting

2. Issuing Bonds at a Discount:

Bonds are issued at below the face value.
Illustration: On January 1, 2020, Berlin Inc. sells $100,000, five-year, 10% bonds for $92,639
(92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the
issuance is:
Jan. 1 Cash 92,639
Bond Payable 92,639

(Discount= 100,000 -92,639 = 7,361)

BERLIN INC.
Statement of Financial Position (partial)
Non-current liabilities
Bonds payable $92,639

Honds Issued at a Discount

St:miannuu1 intert:sl payments
($100,000 X IO'X, X 1/z $5,000:$5.000 X 10) $50.000
Add: Bond discount ($1 00,000 - $92,639) 7.361
Total cost

Bonds Issued .at a Disconnf

Principal at tnaturity
Semiannual interest payments ($5,000 x 10)
Cash to be paid to bondhold.:rs
Cash received frcnn bonUholdcrs
of hor.ro,vini-t

$ 7,361 discount is an additional cost of borrowing.

Cost of borrowing is the total charge for taking on a debt obligation.
Amortizing Bond Discount: The straight-line method is used for amortization of bond
discount or bond premium.
• Discount on Bonds payable increases interest expense. So, to amortize discount the
following journal entry is used.

Interest Expense .................... xx

Bonds Payable...... xx

Berlin, Inc., sold $100,000, five-year, 10% bonds on January 1, 2020, for $92,639 (discount of
$7,361). Interest is payable on July 1 and January l. The bond discount amortization for each
interest period is $736 ($7,361/10).
Journal entry on July 1, 2020, to record the interest payment and amortization of discount is as
follows:
July 1 Interest Expense 5,736
Bonds Payable 736
Cash 5,000

Bond Discount Amortization Table

Semi-annual A) Interest to B)Interest C) Discount D)Bond
Interest be paid Expense to be Amortization Carrying
periods (100,000*5%) recorded(A+C) (7,361/10) Value (D+C)
Issue Date $92,639
1 5,000 5,736 736 93,375
2 5,000 5,736 736 94,111
3 5,000 5,736 736 94,847
4 5,000 5,736 736 95,583
5 5,000 5,736 736 96,319
6 5,000 5,736 736 97,055
7 5,000 5,736 736 97,791
8 5,000 5,736 736 98,527
9 5,000 5,736 736 99,263
10 5,000 5,737 737 100,000
TOTAL $50,000 $57,361 $7,361

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ACT1600 Fundamentals of Financial Accounting

3. Issuing bonds at a Premium

Bonds are issued at above face value.
Illustration: On January 1, 2020, Berlin, Inc. sells $100,000, five-year, and 10% bonds for
$108.111 (1 08.111% of face value). Interest is payable on July 1 and January 1. The entry to
record the issuance is:
Jan. 1 Cash 108,111
Bonds Payable 108,111
(Premium= 108,111-100,000= 8,111)

BERLIN INC.
Statement of Financial Position(
Non-current liabilities
Bonds a able $108,111

Bonds hsued ut a Premium

Serniannual infercst pwytncnt.s
($100.000 X 10% X 1/o = $).000:$5.000 10) $:'i0.000
Less: Bond premium ($lOS. I I l - S I 00.000) S.lll

Uonds Issued at a Premium

Principal at maturity $100.000
Semiannual interest payments ($:'i.OOO X 10) 50.000
Cash to be paid to bondholders 150.000
Cosh received from bondholders 11

>- Total cost of borrowing is less than the bond interest paid.
>- The borrower is not required to pay the bond premium at the maturity date of the
bond.
Amortizing bond premium
Note: premium on Bonds Payable must be cancelled during the remaining life ofB/P. The life of
the bond is counted from the month of issue until maturity date. Premium on B/P is used to
reduce interest expense.
Journal entry to amortize bond premium
Bonds Payable ......................................... xx
Interest Expense............................ xx

Berlin, Inc., sold $100,000, five-year, 10% bonds on January 1, 2020, for $108, Ill (premium of
$8,111). Interest is payable on July 1 and January 1. The bond premium amortization for each
interest period is $811 ($8, lll/1 0).
Journal entry on July 1, 2020, to record the interest payment and amortization of premium is as
follows:
July 1 Interest Expense 4,189
Bonds Payable 811
Cash 5,000
Bond Premium Amortization Table
Semi- A)Interest to B) Interest C)Premium D)Bond
annual be paid Expense to be Amortization Carrying Value
Interest (100,000*5%) recorded(A-C) (8,111/10) (D-C)
periods
Issue Date $108,111
1 5,000 4,189 811 107,300
2 5,000 4,189 811 106,489
3 5,000 4,189 811 105,678
4 5,000 4,189 811 104,867
5 5,000 4,189 811 104,056
6 5,000 4,189 811 103,245
7 5,000 4,189 811 102,434
8 5,000 4,189 811 101,623
9 5,000 4,189 811 100,812
10 5,000 4,189 812 100,000
TOTAL $50,000 $41,889 $8,111

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ACT 1600 Fundamentals of Financial Accounting

Accounting Bond

>- Redeeming Bonds at Maturity

Assuming that the company pays and records separately the interest for the last interest period,
Berlin records the redemption of its bonds at maturity as follows:

Bonds Payable 100,000

Cash 100,000

>- Redeeming Bonds before Maturity

When retiring bonds before maturity, it is necessary to:
l. eliminate the carrying value of the bonds at the redemption date;
2. record the cash paid; and
3. recognize the gain or loss on redemption.

The carrying value of the bonds is the face value of the bonds less unamortized
bond discount or plus unamortized bond premium at the redemption date.

Premium bond= FV +Unamortized bond premium

Discount bond= FV- Unamortized discount

Illustration: Assume Berlin Inc. has sold its bonds at a premium. At the end of the eighth
period, Berlin retires these bonds at 103 after paying the semiannual interest. The carrying value
of the bonds at the redemption date is $101,623. Berlin makes the following entry to record the
redemption at the end of the eighth interest period is:

Bonds Payable 101,623

Loss on Bond Redemption 1,377
Cash (1.03*100,000) 103,000

• If it is a Gain on Redemption, it should be credited.

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ACT1600 Fundamentals ofFinancial Accounting

SUMMARY OF JOURNAL ENTRIES:

Issuing bonds at Face value

Date of Issue:
Jan]: Cash 100,000
Bonds Payable 100,000

Pal::ment of interest semi annualll::

July 1: Interest Expense 5,000
Cash 5,000

Adjusting accrued interest at the end of the year:

Dec31: Interest Expense 5,000
Interest Payable 5,000

Pal::ment of accrued interest in the next l::ear:

Jan!: Interest Payable 5,000
Cash 5,000

I ssume: b on d s at a Discount
Date of issue:
Jan1: Cash 92,639
Bonds Payable 92,639

Pal::ment of interest and amortization of bond discount:

July1: Interest Expense 5,736
Bonds Payable 736
Cash 5,000

Adjusting accrued interest and amortization of bond discount:

Dec31: Interest Expense 5,736
Bonds Payable 736
Interest Payable 5,000

I ssume: b on d s at a p remmm
Date of Issue:
Janl: Cash 108,111
Bonds Payable 108,111

Pal::ment of interest and amortization of Bond

July1: Interest Expense 4,189
Bonds Payable 811
Cash 5,000

Adjusting accrued interest and amortization of Bond

Dec31: Interest Expense 4,189
Bonds Payable 811
Interest Payable 5,000

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ACT1600 Fundamentals of Financial Accounting

EXERCISES

Exercise 1:
Ramsy Corporation issued 4,000, 6%, 5-year, $1,000 bonds dated January 1, 2020, at 100.
a) Prepare the journal entry to record the sale of these bonds on January 1, 2020.
b) Prepare the journal entry to record the first interest payment on July 1, 2020,
(interest payable semiannually).
c) Prepare the adjusting journal entry on December 31, 2020, to record interest expense.

Date Account Titles B.ef. Debit Credit

-
Exercise 2:
Mistime Company issues $!million, 10-year, 5% bonds at 97, with interest payable on July 1 and
January 1.
a) Prepare the journal entry to record the sale ofthese bonds on January 1, 2020.
b) Assuming instead that the above bonds sold for 104, prepare the journal entry to record the
sale of these bonds on January 1, 2020.

Date Account Titles Ref. Debit Credit

Exercise 3:
On January 1, 2020 Lobo Company issued $200,000, 8%, 10-year bonds at face value. Interest is
payable semiannually on July 1 and January 1.
Prepare journal entries to record the following.
a) The issuance of the bonds.
b) The payment of interest on July 1.
c) The accrual of interest on December 31.

Date Account Titles Ref. Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Exercise 4:
Lu Company issues $3 million, 10-year, 9% bonds at 96, with interest payable on July 1 and
January 1. The straight-line method is used to amortize the bond discount.
a) Prepare the journal entry to record the sale ofthese bonds on January 1, 2020.
b) Prepare the journal entry to record interest expense and bond discount amortization on July 1,
2020.
c) Prepare the journal entry to record the accrual of interest and the discount amortization on
December 31,2020.

Date Account Titles Ref. Debit Credit

Exercise 5:
Jasmine Inc. issues $2 million, 5-year, 10% bonds at 102, with interest payable on July 1 and
January 1. The straight-line method is used to amortize bond premium.
a) Prepare the journal entry to record the sale of these bonds on January 1, 2020.
b) Prepare the journal entry to record interest expense and bond premium amortization on July 1,
2020.
c) Prepare the journal entry to record the accrual of interest and the premium amortization on
December 31, 2020.

Date Account Titles Ref. Debit Credit

Exercise 6:
The following section is taken from Amster Corp.'s statement of financial position at December
31,2018.
Non-current Liabilities
Bond Payable, 7%, due January 1, 2023 $1,600,000
Current Liabilities
Interest Payable 56,000
Bond interest is payable semiannually on January 1 and July 1. The bonds are callable on any
interest date.
a) Journalize the payment of the bond interest on January 1, 2019.

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ACT1600 Fundamentals of Financial Accounting

b) Assume that on January 1, 2019, after paying interest, Amster calls bonds having a face value
of$600,000. The call price is 104. Record the redemption of the bonds.
c) Prepare the entry to record the payment of interest on July 1, 2019, assuming no previous
accrual of interest on the remaining bonds.

Date Account Titles Ref. Debit Credit

Exercise 7:
Presented below are two independent situations.
1. Arnold Ltd. retired $130,000 face value, 12% bonds on June 30, 2020, at 102. The
carrying value of the bonds at the redemption dafe was $117,500. The bonds pay
semiannual interest, and the interest payment due on June 30, 2020, has been made and
recorded.
2. Marvin Inc. retired $150,000 face value, 12.5% bonds on June 30, 2020, at 97. The
carrying value of the bonds at the redemption date was $151,000. The bonds pay
semiannual interest, and the interest payment due on June 30, 2020, has been made and
recorded.

Date Account Titles Ref. Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problems:
Problem 1:
Brewer Company issued $700,000, 9%, 20-year bonds on January 1, 2021, at 103. Interest is
payable semiannually on July 1 and January 1. Brewer uses straight-line amortization for bond
premium or discount.
Instructions:
Prepare the journal entries to record the following.
1. The issuance of the bonds.
2. The payment of interest and the premium amortization on July 1, 2021.
3. The accrual of interest and premium amortization on December 31, 2021.
4. The redemption of the bonds at maturity, assuming interest for the last interest period has
been pal"d and recorded .
Date Account Titles Ref. Debit Credit

Problem 2:
Yuan Company issued $600,000, 7%, 10-year bonds on December 31, 2020, for $575,000.
Interest is payable semiannually on June 30 and December 31. Yuan uses straight-line
amortization for bond premium or discount.
Instructions:
Prepare the journal entries to record the following.
1. The issuance of the bonds.
2. The payment of interest and the discount amortization on June 30,2021.
3. The payment of interest and discount amortization on December 31, 2021.
4. The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.

Date Account Titles Ref. Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problem 3:
Santosa Electric sold $400,000, 9%, 10-year bonds on January 1, 2021. The bonds were dated
January 1 and paid interest on January 1 and July 1. The bonds were sold at 105.
Instructions:
a) Prepare the journal entry to record the issuance of the bonds on January 1, 2021.
b) Prepare the journal entry to record the payment of interest and the premium amortization on
July 1, 2021.
c) Prepare the journal entry to record the accrual of interest and premium amortization on
December 31 ,2021.
d) At December 31,2021, the amount of unamortized bond premium is $18,000. Show the
statement of financial position presentation of accrued interest and the bond liability at
December 31, 2021.
e) On January 1, 2023, when the carrying value of the bonds was $416,000, the company
redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the
peno. d has aIrea d1y b een pa1"d .
Date Account Titles Ref. Debit Credit
a)

-
b)

c)

d)

Date Account Titles Ref. Debit Credit

e)

Problem 4:
Vancouver Company sold $3,000,000, 8%, 10-year bonds on July 1, 2021. The bonds were dated
July 1, 2021 and pay interest July 1 and January 1. Vancouver Company uses the straight-line
method to amortize bond premium or discount. Assume no interest is accrued on June 30.
Instructions;
a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest
expense for 2021, assuming that the bonds sold at 103.
b) Prepare journal entries as in part (a) assuming that the bonds sold at 96.
c) Show statement of financial position presentation for each bond issued at December 31, 2021.

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ACT1600 Fundamentals of Financial Accounting

a) and b)
Date Account Titles Ref. Debit Credit

1---

c)

Problem 5:
Bee Company sold $5,000,000, 8%, 20-year bonds on January 1, 2019. The bonds were dated
January 1 and pay interest July 1 and January 1. Bee Company uses the straight-line method to
amortize bond premium or discount. The bonds were sold at 97.
Instructions:
a) Prepare the journal entry to record the issuance of the bonds on January 1, 2019.
b) Prepare a bond discount amortization schedule for the first 4 interest periods.
c) Prepare the journal entries for interest and the amortization of the discount in 2019 and 2020.
d) Show the statement of financial position presentation of the bond liability at
December 31,2020.
a)
Date Account Titles Ref. Debit Credit

b)
Semiannual A) Interest to be B) Interest C) D) Carrying Value
interest periods paid expense to be Amortization
recorded

176
ACT1600 Fundamentals of Financial Accounting

c)
Date Account Titles Ref. Debit Credit

'

d)

Problem 6:
Jacob Electric sold $2,000,000, 9%, 10-year bonds on January 1, 2019. The bonds were dated
January 1 and pay interest July 1 and January 1. Jacob Electric uses the straight-line method to
amortize bond premium or discount. The bonds were sold at 104.
Instructions:
a) Prepare the journal entry to record the issuance of the bonds on January 1, 2019.
b) Prepare a bond premium amortization schedule for the first 4 interest periods.
c) Prepare the journal entries for interest and the amortization of the premium in 2019 and 2020.
d) Show the statement of financial position presentation of the bond liability at December 31,
2020.

I Account Titles
IR•f.l D•bit ICrOO;t I

b)
Semiannual A) Interest to be B) Interest C) D) Carrying value
interest periods paid expense to be Amortization
recorded

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ACT1600 Fundamentals of Financial Accounting

c)
Date Account Titles Ref. Debit Credit

d)

Problem7:
1. On January l, 2021, Mades Company issued $400,000 face value, 8%, 6- year bonds for
$388,000. The interest payment dates of the bonds are July! and January!. Premium I
discount are amortized using straight-line method. Financial statements are prepared
annually on December 31.
Instructions:
a. Prepare the journal entry on January l, 2021 for the issuance of the bonds.
b. Prepare an amortization schedule for the first 4 interest periods.

2. On July 1, 2021, Electro Company issued $300,000 face value, l 0%, 8- year bonds for
102. Interest is payable semi-annually on January! and July l. The company uses
straight- line method to amortize premium/discount. Financial statements are prepared
annually on December 31. (one- year accounting period).
On July 1, 2022, after paying interest the company redeemed 50% of the bonds at 104.
Instructions:
Prepare all necessary journal entries relating to the above bonds for 2021 and 2022.

1. a)
Date Account Titles Ref. Debit Credit

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ACT1600 Fundamentals of Financial Accounting

b)
Semiannual A) Interest to be B) Interest C) D) Carrying value
interest paid expense to be Amortization
neriods recorded

2
Date Account Titles Ref. Debit Credit

Problem 8:
ThitadaLalita Company issued $700,000, 9%, 3-year bonds for $682,000 on January 1, 2019.
Interests on the bonds are to be paid semi-annually on January l and July 1. The company uses
straight-line method to amortize bond premium or discount. Premium I Discount are amortized
at the interest dates and at the end of the accounting period (December 31 ).
Instructions:
a) Prepare the journal entry on January 1, 2019, the necessary entries for the year 2019,
and the entry on January 1, 2020. (Answer by using the compound entry)
b) Prepare the amortization schedule for the first four interest periods.
c) Show the statement of financial position presentation of all the liabilities at December 31,
2020.
d) Prepare the journal entry for the redemption of the bonds at maturity date including the
payment of accrued interest.
e) Assume that the above bonds were redeemed on January 1, 2021 at 105. Prepare the
journal entry for redemption of the bonds assuming that interest for the period has already
been paid and recorded.
a)
Date Account Title Debit Credit

179
ACT1600 Fundamentals of Financial Accounting

b)
Semiannual A) Interest to B) Interest expense C) Amortization D) Bond carrying
Interest be paid to be recorded per 6 months value

Issued date

c)

[ I

****************************

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ACT1600 Fundamentals of Financial Accounting

CHAPTER 12
CORPORATIONS: ORGANISATION, SHARE
TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS
Objectives:
I. Identify the major characteristics of a Corporation.
2. Record the issuance of preference shares and ordinary shares.
3. Explain the accounting for treasury shares.
4. Record cash dividends and share dividends.
5. Identify the items reported in a Retained Earnings Statement.

The Corporate Form of Organization: A corporation is an entity separate and distinct

from its owners. It has the same duties and responsibilities as a person who must follow the laws
and pay taxes.
A Corporation is classified in two ways:
I. By purpose- for profit or non-profit corporations
2. By ownership- for publicly held or privately held corporations
Characteristics of a Corporation
+ Separate Legal Existence
The corporation acts under its own name rather than in the name of its shareholders.
+ Limited Liability of Shareholders
Since a corporation is a separate legal entity, creditors have recourse only to corporate
assets to satisfy their claims. The liability of shareholders is normally limited to their
investment in the corporation.
+ Transferable Ownership Rights
The transfer of shares is entirely at the discretion of the shareholders. It does not require
the approval of either the corporation or other shareholders.
+ Ability to Acquire Capital
It is easier for a corporation to obtain capital through issuing shares.
+ Continuous Life
Its continuance as a going concern is not affected by the withdrawal, death, or incapacity
of a shareholder, employee, or officer. As a result, a successful corporation can keep
going on and have indefinite life.
+ Corporate Management
Shareholders legally own the corporation. Therefore, they can manage the corporation
indirectly through a board of directors they elect. The board then will formulate the
policies for the company and select officers to execute policy and to perform
management functions.
+ Government Regulations: A corporation is subject to governmental regulations. Laws
prescribe the requirements for issuing shares, distributions of earnings permitted to
shareholders, and effects of retiring shares. Securities laws govern the sale of shares to
the public. Government regulations are designed to protect the owners of the
corporation.
+ Additional Taxes
Corporation must pay government taxes as a separate legal entity. In addition,
shareholders must pay taxes on cash dividends.

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Stock Certificate

Summary of advantages and disadvantages of a Corporation compared to a Proprietorship

and a Partnership

Advantages Disadvantages

• Separate legal existence • Corporation management -

• Limited liability of shareholders separation of ownership and
• Transferable ownership rights management
• Ability to acquire capital • Government regulations
• Continuous life • Additional taxes
• Corporation management -
professional management

Ownership Rights of Shareholders for Ordinary Shares

Shareholders have the right to
1. Vote in election of board of directors and on actions that require shareholders' approval.

3. Keep the same percentage ownership when new shares are issued (preemptiveright*).
Before After

New shares issued

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ACT1600 Fundamentals of Financial Accounting

4. Share in assets upon liquidation in proportion to their holdings. This is called a residual
claim
Shm-eholders

Credit.ors

Share Issue Considerations

+ Authorized Shares
Charter indicates the number of shares that a corporation is authorized to sell. The total amount
of authorized shares at the time of incorporation nonnally anticipates both initial and subsequent
capital needs.

+ Issuance of Shares
A corporation can issue shares directly to investors or issue indirectly through an
investment banking firm that specializes in bringing securities to the attention of
prospective investors.
> Factors in setting price for a new issue of shares:
1. Company's anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
+ Market Price of Shares
> Shares of publicly held companies is traded on organized exchanges.
> Interaction between buyers and sellers detennines the price per share.
> Prices tend to follow the trend of a company's earnings and dividends.
> Factors beyond a company's control may cause day-to-day fluctuations in market prices.
•!• Par and No-Par Value Shares
• Years ago, par value determined the legal capital per share that a company must
retain in the business for the protection of corporate creditors.
• Today many governments do not require a par value.
• No-par value shares are fairly common today.
• In many countries the board of directors assigns a stated value to no-par shares.
Corporate Capital
Equity is identified by various names: Stockholders' Equity, Shareholders' Equity, or
Corporate Capital. The equity section consists of two parts:
(I) Share Capital - is cash and other assets paid in to the corporation by the shareholders in
exchange for shares.
(2) Retained Earnings- is net income that a corporation retains for future use.

Accounting lor Share Transactions

The primary objective in accounting for the issuance of shares is to identify the specific
sources of capital.

Accounting for Ordinary Shares

Issuing Par Value Ordinary Shares for Cash

The cash proceeds from issuing par value shares may be equal to, greater than, or less than
par value. When shares are issued for less than par value, it debits the account Share
Premium-Ordinary if a credit balance exists in this account. If a credit balance does not
exist, then it debits to Retained Earnings the amount less than par. Most jurisdictions do not
allow selling shares below par value because shareholders may be held personally liable for
the difference between the price paid upon original sale and par value.
Issuing Ordinary shares at Par Value
Ex. Russo Inc. issues I ,000 shares of $1 par value ordinary shares at par for cash. The entry
to record this transaction is:
Janl: Cash............................................. I,OOO
Share Capital- Ordinary (1,000 x I)... 1,000

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ACTI600 Fundamentals of Financial Accounting

Issuing At More than Par Value

Ex. Russo Inc. issues an additional 1,000 shares of the $1 par value ordinary shares for cash
at $5 per share. The entry to record this transaction is:
Jan!: Cash (1,000x5) ......................................... 5,000
Share Capital-Ordinary (1,000 x 1) .... . 1,000
Share Premium-Ordinary .................. . 4,000
Issujng No- Par ordjnary shares for Cash (stated ya!ue)
When no-par shares have a stated value, the entries are similar to those of par value shares. In
case no-par shares do not have a stated value, the corporation credits the entire proceeds to
Share Capital-Ordinary.
Ex. Russo Inc. issues 5,000 shares of $5 stated value no-par shares at $8 per share for cash.
The entry is:
Jan!: Cash (5,000x8) .................................... 40,000
Share Capital- Ordinary(5,000 x 5) .... . 25,000
Share Premium- Ordinary .............. . 15,000

If Russo Inc. does not assign a stated value to its no-par shares, it records the issuance of the
5,000 shares at $8 per share for cash as follows:
Jan 1: Cash................................... 40,000
Share Capital-Ordinary.... 40,000

Issuing Ordinary Shares for Services or Non-Cash Assets

Corporations also may issue shares for:
+ Services (attorneys or consultants).
+ Noncash assets (land, buildings, and equipment).

Cost is either the fair market value of the consideration given up, or the fair market
value of the consideration received, whichever is more clearly determinable.

Issuing Ordjnary Shares for Services; Ex. Attorneys have billed Russo Inc. $5,000 for their
services. Russo Inc. issues 4,000 shares of $1 par value ordinary shares in payment of their bill.
Janl: Organization Expense............................... 5,000
Share Capital-Ordinary (4,000 x 1) .... . 4,000
Share Premium- Ordinary ............... . 1,000
Issuing Ordinary shares in exchange for non- cash assets
Ex. Russo Inc. issues 10,000 shares to acquire land recently advertised for sale at $90,000. The
company's $5 par value shares are actively traded at $8 per share. This transaction is recorded
as follows:
Jan!: Land (10,000 x 8) ......................................... 80,000
Share Capital-Ordinary (10,000 x 5) ..... . 50,000
Share Premium-Ordinary .................... . 30,000

Accounting for Preference Shares

Preference shares may have a par value or no-par value. In the equity section, the corporation
lists preference shares first because of their dividend and liquidation preferences over ordinary
shares. Accounting for preference shares at issuance is similar to that for ordinary shares.
Dividend Preferences
+ Right to receive dividends before ordinary shareholders.
+ Cumulative Dividend - preference shareholders must be paid both current-year
dividends and any unpaid prior-year dividends before ordinary shareholders receive
dividends.
+ No obligation exists until board of directors declares a dividend.
liquidation Preferences
+ Most preference shares have a preference on corporate assets if the corporation fails.
+ Provides security for the preference shareholder.
+ Preference to assets may be for the par value of the shares or for a specified liquidating
value.

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ACT1600 Fundamentals of Financial Accounting

Accounting for Treasury Shares

Treasury Shares are a corporation's own shares that it has issued and later reacquired from
shareholders, but not retired.
There are 3 important features: -
1) Treasury Share is a contra-equity account reported as a reduction in Shareholders'
Equity.
2) No income or loss on reacquisition, reissuance or retirement of Treasury Shares.
3) Retained Earnings can be decreased by Treasury Shares but is never increased.

Corporations purchase their outstanding shares to:

1. Reissue the shares to officers and employees under bonus and share compensation
plans.
2. Enhance the share's market value.
3. Have additional shares available for use in the acquisition of other companies.
4. Increase earnings per share.
5. Eliminate hostile shareholders by buying them out.
Methods to reacquire.
1. By exercising call or redemption provisions.
2. By repurchasing in the open market.

A company's share may be reacquired for:-

- immediate retirement or
- be reacquired & held as Treasury Share for subsequent disposition, either eventual
retirement or reissuance.

Cost Method is used for accounting for Treasury shares.

Purchase of Treasury Shares:

Russo Inc. purchased 4,000 of its shares at $8 per share.

Jan1: Treasury Shares ............... . 32,000

Cash .................. . 32,000

Sale of Treasury Shares above Cost Prjce:

Russo Inc. sells for $10 per share the 1,000 treasury shares previously acquired at $8.

Marl: Cash ................................... . 10,000

Treasury Shares ............... . 8,000
Share Premium- Treasury ... . 2,000

Sale of Treasury Shares below Cost Price:

Russo Inc. sells an additional 800 treasury shares at $7 per share.
Marl: Cash (800*$7)......................... 5,600
Share Premium- Treasury......... . . . 800
Treasury Shares (800*$8).. .. 6,400

When a Company fully depletes the credit balance in Share Premium-Treasury it debits to
Retained Earnings any additional excess of cost over selling price.

Ex. Russo Inc. sells its remaining 2,200 shares at $7 per share.
Mar 1: Cash.................................. 15,400
Share Premium- Treasury. . . . . . . . . 1,200
Retained Earnings.................. 1,000
Treasury Shares ........ . 17,600

Accounting for Dividends

A dividend is a corporation's distribution of cash or shares to it shareholders on a pro rata
basis.
1. Cash Dividends- is a pro rata distribution of cash to shareholders. For a corporation
to pay a cash dividend, it must have (1) Retained Earnings, (2) Adequate Cash, (3) A
declaration of dividends.

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ACT1600 Fundamentals of Financial Accounting

Three dates are important in connection with dividends:

1) Date of Declaration -the board of directors formally declares the cash dividend and
announces it to shareholders.
Ex. The directors of Russo Inc. declare a $.50 per share cash dividend on 100,000
$10 par value ordinary shares. The dividend is $50,000. The entry to record is:
Cash Dividends (1 00,000*$.50)......... .. 50,000
Dividends Payable.................. 50,000

2) Date of Record- The company detennines ownership of the outstanding shares for
dividend purposes
No entry is required on this date. The company only makes a list of shareholders who
can receive dividend.

3) Date of Payment- The company makes cash dividend payments to the shareholders
and cancels liability "Dividends Payable"
Dividends Payable.................. 50,000
Cash......................... 50,000
Dividends are expressed: (1) as a percentage of the par or stated value, or (2)
as a dollar amount er share.
Holders of cumulative preference shares must be paid any unpaid prior-year dividends
before ordinary shareholders receive dividends.
2. Share Dividends
-is a pro rata distribution of the corporation's own shares to shareholders.
- results in a decrease in retained earnings and an increase in share capital and share
premium.
- no transfer of cash or any other assets.

Reasons why corporations issue share dividends:

1. Satisfy shareholders' dividend expectations without spending cash.
2. Increase marketability of the corporation's shares.
3. Emphasize a portion of equity has been permanently reinvested in the business.

Number of shares to be distributed as share dividend

(Outstanding no. of shares /!I share dividend rate)

Date of Declaration
Ex. Russo Inc. declares a 10% share dividend on its 50,000 shares of $10 par value
ordinary shares. The current fair value of its shares is $15 per share.
The number of shares to be issued is 5,000 shares (10% x 50,000).
The journal entry is:
Share Dividend (5,000 x $15) ........................... 75,000
Ordinary Share Dividends Distributable (5,000 x 10) ... . 50,000
Share Premium - Ordinary ................................... . 25,000

Date of Issyance of Share Dividends

Ordinary Share Dividends Distributable................ 50,000
Share Capital- Ordinary .................... . 50,000

Ordinary Share Dividends Distributable is an equity account. Therefore, if a

company prepares a Statement of Financial Position before it issues the dividend
shares, it should be shown as follows:
Share Capital-Ordinary $500,000
Ordinary Share Dividends Distributable 50,000 550,000

Outstanding number of shares = Number of shares issued - Number of Treasury shares

ending.
Number of Treasury shares ending =
Number of treasury shares beginning + Number of
treasury shares purchased - Number of treasury shares sold

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ACT1600 Fundamentals of Financial Accounting

Effects of Share Dividends

Befot·e After
Dividend Dividend
Equity
Shan: capital-onlinm·y €500,000 € 550,000
Shn1·e pren1iurn-ordinal)·' 25,000
Reluincc.l eut·nings 300.000 225,000
Total equity €800,000 €800,000
Outstanding shar:cs 50,000 55,000
Par vulue per share €10.00 € 10.00

Share Split
Share Split involves issuance of additional shares to shareholders according to their
percentage ownership. A share split results in a reduction in the par or stated value per share.
The purpose of share split is to increase the marketability of the shares by lowering the market
price per share. This makes it easier for the corporation to issue additional shares. In a share
split, the number of shares increases in the same proportion that par or stated value per share
decreases. However, total equity remains the same.
Factors affecting Retained Earnings:
Retained Eamings
L N<;>iloss I. Net income
2. Prior period atljustmcnls for 2. Prior adjustments for
m·erstatement of net income of net income
3. Cash dil'idends and share dil'idends
4. Some disposals of shnres

There are often terminology differences for equity accounts.

-------
-····-------·-------- ...... IFRS
------ -----·-----·----------·-------
..............
c:c•nlrnon stock Shar·c t..'apiial·······ordinnry
Shnl·cll(>l<:.lct·h
A1tlhod.zed sl<,ck i\uthod:;.;.cd capilnl
Pn..·f... stock ..':JlCL'
P:cdd--in capital shat·c cupilnl
P:..lid-in t:apilul in of par-;,.:ornrnon Shnn.': pn..•rniurn-(>nJinat-_y
c"pital in or
Retnincd RC"tairH.•d c-nr·ning:.,. ot·
Rctnin<..·d (_k•flcil A.ccurnulat(..•d
oth .. <.eOfl"lprt.dll.!ltsh.·(_• ..:t""V(_• und olltcr ac<:<HIUts

FORMAT OF EQUITY SECTION:

Russo Inc.
Statement of Financial Position (partial)
Pecember 31. 20xx
Shareholders' Equjty
Share Capital- Preference, 10%$100 par (or Face) value,
5,000 shares authorized, 3,000shares issued $300,000
Share Capital- Ordinary, $5 par value, 300,000 shares authorized,
205,000 issued, 202,500 outstanding l ,025,000
Ordinary share dividends distributable 50,000
Share Premium- Preference 20,000
Share Premium- Ordinary 442,000
Share Premium- Treasury 4,000
Retained Earnings 828,000
Less: Treasury shares- ordinary (2,500 shares) (20,000)
Total equity $2,649,000

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ACT1600 Fundamentals of Financial Accounting

Exercises

Exercise 1: Opal Company issued 2,000 ordinary shares.

Required: Prepare the journal entries for the issuance of the ordinary shares under the following
cases.
a) The shares with par value of $10 per share were issued for cash at a total of $96,000.
b) The shares with a stated value of $15 per share were issued for cash at a total of $110,000.
c) The shares with no-par or stated value were issued for cash at a total of$96,000.
d) The shares with par value of $10 per share were issued to lawyer for services during
incorporation valued at $90,000.
e) The shares with par value of $10 per share were issued for building worth $120,000.

Account Title Debit Credit

Exercise 2: Laser Co. had the following transactions during the current period.
Feb. 2 Issued 5,000 $1 par value ordinary shares to attorneys in payment of a bill
for $38,000 for services provided in helping the company to incorporate.
May 5 Issued 60,000 $1 par value ordinary shares for cash of $475,000.
June 6 Issued 1,000 $100 par value preference shares for cash at $110 per share.
Nov. 7 Purchased 2,000 treasury shares for $18,000.
Instructions: Journalize the transactions.

Date Account Title Debit Credit

Feb 2

MayS

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ACT1600 Fundamentals of Financial Accounting

June 6

Nov7

Exercise 3: On January 1, Clamp ton Corporation had 98,000 no-par ordinary shares issued and
outstanding. The shares have a stated value of $4 per share. During the year, the following
occurred.
Apr.l Issued 25,000 additional ordinary shares for cash at $17 per share.
June 15 Declared a cash dividend of$1 per share to shareholders of record on
June 30.
July 10 Paid the $1 cash dividend.
Dec. I Issued 2,000 additional ordinary shares for cash at $19 per share.
15 Declared a cash dividend on outstanding shares of $1.20 per share to
shareholders of record on December 31.
Instructions:
Journalize the transactions.

Date Account Title Debit Credit

Apr 1

June 15

July 10

Dec 1

Dec 15

Exercise 4: Journalize each of the situation below:

I. On March 10, the corporation acquired land by issuing 10,000 $20 par value ordinary shares.
The owner's asking price for land was $320,000, and the fair value of land was $280,000.
2. On August 20, the corporation acquired land by issuing 20,000 $20 par value ordinary shares.
At the time of exchange, the land was advertised for sale at $460,000. The shares were
selling at $22 per share.

Date Account Title Debit Credit

March 10

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ACT1600 Fundamentals of Financial Accounting

b-t20 + - - I_

Exercise 5: Lazana Corp. issued 50,000 $20 par value, cumulative, 10% preference shares for
cash on January 1, 2019, for $1,040,000. In December 2021, Lazana declared its first dividend
of $280,000.
Required:
a) Prepare journal entry to record the issuance of the preference shares.
b) If the preference shares are not cumulative, how much of the $280,000 would be paid to
ordinary shareholders?
c) If the preference shares are cumulative, how much of the $280,000 would be paid to ordinary
shareholders?

Date Account Title Debit Credit

a) Jan 1

-·

b)

c)

6: On January 1, 2020, Darby Co. had $600,000 of ordinary shares outstanding that
were issued at par. The company issued 33,000 ordinary shares at par on May 1.
Required: Journalize the declaration of 15% share dividend on November 20, 2020, for the
following independent situations.
a) Par value is $6, and market price is $16.
b) Par value is $8, and market price is $20.

Date Account Title Debit Credit

a) Nov 20

b) Nov 20

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ACT1600 Fundamentals of Financial Accounting

Problems
Problem 1:
Deccan Corporation was organized on January 1, 2020. It is authorized to issue 10,000, 8%
$1,000 par value preference shares, and 500,000 no-par ordinary shares with a stated value of
$20 per share. The following share transactions were completed during the first year.
Jan.10 Issued 100,000 ordinary shares for cash at $50 per share.
Mar.1 Issued 5,000 preference shares for cash at $1,050 per share.
Apr.1 Issued 18,000 ordinary shares for land. The asking price of the land was $980,000. The
fair value of the land was $920,000.
May 1 Issued 80,000 ordinary shares for cash at $45 per share ...
Aug.l Issued 10,000 ordinary shares to attorneys in payment of their bill of $300,000 for
services provided in helping the company organize.
Sept.l Issued 10,000 ordinary shares for cash at $50 per share.
Nov.l Issued 1,000 preference shares for cash at $1,080 per share.
Instructions:
(a)Joumalize the transactions.
(b )Prepare the share capital section of the statement of financial position at December 31, 2020.

a)
Date Account Title Debit Credit
Jan 10

Marl

Apr 1

Mayl

Aug 1

Sept 1

Nov 1

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ACT1600 Fundamentals of Financial Accounting

b) Shareholders' Equity Section

Problem 2:
Elvis Company had the following equity accounts on January 1, 2020: Share Capital-Ordinary
($1 0 par) $800,000, Share Premium- Ordinary $400,000, and Retained Earnings $200,000. In
2020, the company had the following treasury share transactions.
Apr. I Purchased I 0,000 shares at $18 per share.
July I Sold I,OOO shares at $24 per share.
Oct. I Sold 5,000 shares at $20 per share.
Nov. l Sold 2,000 shares at $12 per share.
The company uses the cost method of accounting to record treasury shares. In 2020, it had net
income of $68,000.
Required:
a) Prepare journal entries for treasury share transactions, and closing entry at December 3I,
2020 for net income.
b) Prepare the equity section at December 3I, 2020.
a)
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

b)
Elvis Company
Statement of Financial Position
December 31,2020
Shareholders' equity:

Problem 3:
The equity accounts of Donald Corporation on January 1, 2020, were as follows.
Share Capital- Preference 8%, $50 par, 12,000 share qpthorized and issued $600,000
Share Capital- Ordinary $1 stated value, 2,200,000 shares authorized,
I ,200,000 shares issued and 1,170,000 shares outstanding 1,200,000
Share Premium - Preference 120,000
Share Premium- Ordinary 1,300,000
Retained Earnings 2,000,000
Treasury Shares- Ordinary (30,000 shares) 120,000

During 2020, the company had the following transactions and events pertaining to its equity.
Mar. 1 Issued 35,000 ordinary shares for $175,000.
May. I 0 Sold 18,000 treasury shares- ordinary for $90,000.
Aug. 5 Issued 10,000 ordinary shares for a patent valued at $62,000.
Oct. 20 Purchased 1,300 ordinary shares for the treasury at a cost of$7,800.
Dec. 31 Net income for the year was $560,000.
***No dividends were declared during the year.
Required:
a) Journalize the above transactions and closing entry for net income.
b) Prepare the equity section at December 31, 2020.

a)
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

b) Shareholders' Equity SectiOn

Problem 4:
On January l, 2020, Paris Corporation had the following equity accounts.
Share Capital- Ordinary $25 par value, 40,000 shares issued and outstanding $1,000,000
Share Premium Ordinary 120,000
Retained Earnings 700,000

During the year, the following transactions occurred.

Mar.l Declared a $2 cash dividend per share to shareholders of record on March 15, payable
on April!.
Apr. I Paid the dividend declared in March.
May. I Announced a 5-for-1 share split. Prior to the split, the market price per share was $38.
Aug.l Declared a 10% share dividend to shareholders of record on August 15,
distributable September 1. On August 1, the market price was $8 per share.
Sep.l Issued the shares for the share dividend.
Nov. I Declared a $1 per share dividend to shareholders of record on November 15, payable
on January 15, 2021.
Dec.31 Detennined that net income for the year was $450,000.
Required:
a) Journalize all transactions and closing entries for net income and dividends.
b) Prepare an equity section at December 31, 2020.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

b) Shareholders' Equity Section

Problem 5:
On January 1, 2020, the shareholders equity section of Malawi Company had the following
equity accounts:
Share Capital-Preference, $100 par value, 10,000 shares authorized and
4,000 shares issued $400,000
Share Capital- Ordinary, $10 par value, I ,000,000 shares authorized,
60,000 shares issued and outstanding 600,000
Ordinary Share Dividends Distributable 45,000
Share Premium- Preference 120,000
Share Premium- Ordinary 240,000
Retained Earnings 184,000

During the year 2020, the following transactions occurred:

Jan. 1 Issued 200 preference shares for cash at $160 per share.
Jan. 1 Distributed the ordinary share dividends declared last year.
Feb. 7 Purchased 2,000 ordinary shares for the treasury at $22 per share.
Apr. 10 Issued 3,500 ordinary shares for cash at $30 per share.
May 4 Sold 1,500 treasury shares for cash at $30 each.
June 1 Declared cash dividends of$5 per share on total number of preference shares issued.
June 30 Paid cash dividends declared on June 1.
Sept. 5 Issued 1,500 ordinary shares to Mars Advertising Company in payment of their
advertising bill. The market value of ordinary shares on September 5 was $20 per share.
Dec. 1 Declared 10% share dividends on 69,000 ordinary shares outstanding. The market price
of ordinary share was $20 per share on December 1.
Dec. 31 Determined that net income for the year was $90,000.
Dec. 31 Closed the dividends accounts.

Required:
a) Prepare the journal entries and closing entries for net income and dividend for the year 2020.
b) Prepare the Shareholders equity section at December 31, 2020.

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ACT1600 Fundamentals of Financial Accounting

a)
Date Account Title Debit Credit

196
ACT1600 Fundamentals of Financial Accounting

b)

Problem 6:
Gromit Corporation is authorized to issue 50,000 5%, $50 par value preference shares, and
1,000,000 ordinary shares with a par value of $1 per share. During the year, the following
transactions occurred
Jan. 12 Issued 50,000 ordinary shares for cash at $6 per share
Feb. 15 Issued 20,000 preference shares for cash at $55 per share.
Apr. 15 Issued 50,000 ordinary shares for land which was advertised for $100,000. The
company estimates the fair value of the land was $65,000.
July 1 Company declares cash dividend of $2.50 per share on its preference shares.
Aug. 20 Gormit company pays the cash dividend.
Sept. 1 Gromit company bought back 10,000 of its ordinary shares for $7 each.
Nov. 15 Gromit company sold 5,000 of the shares that it bought back for $9 each.
Dec. I Issued 5,000 preference shares for cash at $60 per share.

. d : J ournar1ze the above transactiOns.

R eqmre
Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

Problem 7:
The equity section of Rachel Corporation on January l, 2019 was as follows:
Share Capital -Preference , 10%, $1,000 par, 8000 shares authorized,
l ,000 shares issued $1,000,000
Share Capital Ordinary, $5 stated value, 20,000,000 shares authorized,
2,000,000 shares issued and 1,990,000 shares outstanding 10,000,000
Share Premium - Preference 250,000
Share Premium - Ordinary 2,500,000
Retained Earnings 998,000
Treasury Shares- Ordinary (10,000 shares) 50,000

D unng
. 2019 , th e corporatiOn hdhflll
a t e o owmg transactiOns an d events pertammg to 1·ts equity.
Jan.lO Issued 11,000 ordinary shares for cash at $75,800.
Mar.13 Purchased 3,500 additional treasury shares (ordinary) at $5 per share.
July.31 Sold 5,500 treasury shares (ordinary) for $40,000.
Oct.21 Issued 30,000 ordinary shares for a patent valued at $160,000.
Dec.31 The net income for the year was $1,345,000.
Required:
a) Journalize the above transactions and the closing entry for net income.
b) Prepare an equity section at December 31,2019.

Date Account Title Debit Credit

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ACT1600 Fundamentals of Financial Accounting

b) Shareholders' Equity Section

Problem 8:
On December 31,2019, the Arab Corporation had the following equity accounts.
Share capital- Ordinary ($1 0 par value, 40,000 shares authorized,
30,000 shares issued and 24,000 shares outstanding) $300,000
Ordinary share dividends distributable 50,000
Share premium - Ordinary 90,000
Share premium -Treasury 40,000
Retained earnings 350,000
Treasury shares- Ordinary (6,000 shares) 90,000

During the six months accounting period ending on June 30, 2020, the following selected equity
transactions occurred.
Jan. 5 Issued 5,000 ordinary shares to purchase a plot of land. The market price of ordinary
shares on the date of purchase was $12 per share.
Jan. 15 Distributed the ordinary share dividends that were declared last year.
Feb. 10 Sold 4,000 treasury shares at $14 per share.
Mar 31 Declared and paid $14,000 cash dividends on ordinary shares outstanding.
June 30 Declared 5% share dividends on 38,000 ordinary shares outstanding. The market value
of ordinary shares on the date of declaration was $12 per share.
June 30 Closed the dividend accounts.
Instructions:
1. Journalize the above transactions and closing entry for dividend.
2. Prepare the shareholders equity section of the statement of financial position as on June
30,2020.

1.
Date Account Titles Debit Credit
Jan 5

Jan 15

Feb 10

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ACT1600 Fundamentals of Financial Accounting

Mar31

June 30

June 30

3. Shareholders' Equity Section

*****************************

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ACT1600 Fundamentals of Financial Accounting

CHAPTER13
INVESTMENTS
Objectives: After studying this chapter, you should be able to:

. Discuss why Corporations invest in Debt and Share investments .

. Explain the accounting for Debt investments .
. Explain the accounting for Share investments .
. Indicate how Debt and Share investments are reported in Financial Statements.
. Distinguish between short-tenn and long-term investments.

jwhy Corporations invest?

Corporations purchase investments in Debt or Share securities for one of three reasons.
I. Corporation may have excess cash.
A company may invest in Debt or Share securities of other companies or
Government agencies if it has excess cash which it may not use for the purchase
of other operating assets at the moment.

2. To generate revenue from Investment income.

A company may also seek to earn passive revenue through investments in other
corporations.

3. For strategic reasons.

A larger or more powerful company may seek to take over another company by
influencing its shareholders in order to give themselves a more competitive
advantage over other companies. It does this by buying off shares of other
companies in order to gain significant or controlling interest over the companies it
seeks to take over.

NOTE: Debt investment means buying Bonds of other companies.

Share investment means buying Shares of other companies.

!Accounting for Debt Investments

Debt investments are investments in government and corporation bonds. Companies need to
make entries to record three important things:
1. The purchase of Bonds,
2. The interest revenue made from Bond Investments,
3. The eventual sale of the Bonds.

1. The purchase of Bonds:

For example, assume that Antelope Corporation buys 50 Namo Inc. 8%, 10 year, $1,000 bonds on
January 1, 2019, at a cost of$50,000. The entry to record the investment is:

Jan 1. Debt Investment 50,000

Cash 50,000

2. Recording the Interest Revenue earned from the Bond Investment

If Antelope Corporation received interest on bonds of $2,000 semi-annually on July 1 and
January 1($50,000 x 8%X 1;2). The entry to record the receipt of interest revenue on July 1 is:

July 1. Cash 2,000

Interest Revenue 2,000

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ACT1600 Fundamentals of Financial Accounting

If Antelope Corporation·s fiscal year ends on December 31, it accrues an interest revenue of
$2,000 earned since July 1. Therefore, the adjusting entry is:

Dec 31. Interest Receivable 2,000

Interest Revenue 2,000

On January 1 Antelope Corporation records receipt of interest as follows:

Jan 1. Cash 2,000
Interest Receivable 2,000

3. Recording Sale of the Bonds.

If Antelope Corp. were to sell its bonds for $54,000 on January 1, 2020, the company would
realize a gain of $4,000.

Jan 1. Cash 54,000

Debt Investment 50,000
Gain on Sale of Debt Investment 4,000

Problem 1: Shanghai Corporation had the following transactions related to debt investment.
Jan 1. Purchased 80, 6%, $1,000 Bing Co. bonds for $80,000 cash. Interest is payable
semiannually on July 1 and January 1.
July 1. Received semiannual interest on Bing Co. bonds.
July 1. Sold 40 Bing Co. bonds for $44,500.
Instructions
a) Journalize the transactions
b) Prepare the adjusting entry for the accrual of interest at December 31.
Date Account Title Debit Credit
a) Jan 1

July 1

July 1

bl Dec 31

Problem 2:
l. Gameboy Co. purchased 70 Coral Company 12%, 10 year, $1,000 bonds on January 1,
2019, for $70,000. The bonds pay interest semiannually on July 1 and January 1.
2. Record the receipt of interest revenue on July 1.
3. Record the adjusting entry on December 31,2019.
4. Record the entry on January 1, 2020.
5. On January 1, 2020, after receiving the interest, Gameboy Co. sold 40 of the bonds for
$40,100.
Instruction: Prepare the journal entries to record the transactions described above.

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ACT1600 Fundamentals of Financial Accounting

Date Account title Debit Credit

1>Jan 1, 2019

2>July 1

3> Dec 31

4>Jan 1, 2020

5)Jan 1, 2020

!Accounting for Share Investments

Share investments are the investments made in the shares of other companies. The accounting for
investments in shares depends on the extent of the investor·s influence over the operating and
financial affairs of the investee.

Percentage of shares the Investor Power Accounting guidelines

owns in Investee company.
Holdings of Less than 20% Insignificant Cost method
Holdings ofBetween 20%and 50% Significant Equity method
Holdings of more than 50% Controlling Consolidated Financial
Statement

Transactions Purchase less than 20% share Purchase between 20% and 50%
(investment is recorded at cost and share (equity method, in which the
revenue recognition only when cash investor records its share of the net
dividend is received) mcome of the in vestee Ill the year
when it is earned)
1) Purchase Share investment. ......... XX Share investment ...... XX
of shares Cash ...................... XX Cash ................... XX
(Purchase price +commission) (Purchase price +commission)

2) Investee Share investment ...... XX

Co. reports net No entry Revenue from share
mcome investment .................... XX

3) Received Cash ........................... xx Cash .......................... XX

cash dividend Dividend revenue ...... XX Share investment ...... XX

4) Sale of Cash (selling price) ......... xx Cash (selling price) ......... XX

shares Share investment (cost) XX Share investment (cost) XX

Difference between selhng price and cost will be recorded either as a gain or loss on sale of
share jnyestment.

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ACT1600 Fundamentals of Financial Accounting

Holdings of Less than 20%

In accounting for share investments of less than 20%, companies use the Cost method.
1. Recording acquisition of share investments
For example, assume that on July I, 2020, Gimly Corporation buys I ,000 shares <l 0% ownership)
of Zloft Corporation. Gimly pays $405 per share. The entry for the purchase is:

Jul 1. Share Investments 405,000

Cash 405,000

2.Recording Dividends
During the time Gimly owns the shares, it makes entries for any cash dividends received. If
Gimly receives cash dividends of $20 per on December 31, the entry is:

Dec 31. Cash 20,000

Dividend Revenue 20,000

3.Recording Sale of Shares

Assume that Gimly Co. receives net proceeds of $395,000 on the sale of its Zloft shares on
February I 0, 2021. Because the shares cost $405,000, Gimly incurred a loss of $10,000. The
entry to record the sale is:

Feb 10. Cash 395,000

Loss on sale of Share Investments 10,000
Share Investment 405,000

Problem 3:Diann Company had the following transactions related to Share Investments.
Feb 1. Purchased 600 ordinary shares ofLipco (2%) for $6,200.
July 1. Received cash dividend of$1 per share on Lipco ordinary shares.
Sept 1. Sold 300 ordinary shares of Lipco for $4,300.
Dec 1. Received cash dividends of$1 per share on Lipco ordinary shares.

Instructions: Journalize the transactions

Date Account title Debit Credit

Feb 1

July 1

Sept 1

Dec 1

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ACT1600 Fundamentals of Financial Accounting

Problem 4: Spring Company had the following transactions related to Ordinary Shares.
Jan 1. Purchased 2,500 ordinary shares of Angeltide Co. (5%) for $142,100.
July 1. Received cash dividend of$3 per share.
Dec 1. Sold 500 ordinary shares of Angeltide for $31,200.
Dec 31. Received cash dividends of $3 per share.
Instructions: Journalize the transactions
Date Account title Debit Credit
Jan 1
M

July 1

Dec 1

-
Dec31

Holdings between 20% and 50%

When an investor owns between 20% and 50% of the ordinary shares of a Corporation, it means
that the investor has significant influence over the investee Company but does not control the
investee. The investee is called an associate. The equity method is used.
Under the equity method, the investor company initially records the investment in ordinary
shares at cost. After that, it adjusts the investment account annually to show the investors equity
in the associate. Each year the investor increases the investment account and increases revenue
for its share of the associate·s net income. The investor also decreases the investment account for
the amount of dividends received. The investment account is reduced for dividends received
because payment of a dividend decreases the net assets of the associate.
Example:
Aliya Company acquires 30% of the ordinary shares of Castor Company for $120,000 on January
1, 2019. The entry to record this transaction is:

Jan 1: Share Investments 120,000

Cash 120,000

For 2019, Castor Company reports net income of $100,000. It declares and pays a $40,000 cash
dividend. Aliya Company records <1 J its share of Castors income, $30,000 <30% x $1 00,000) and
<2Jthe reduction in the investment account for the dividends received, $12,000 ($40,000 X 30%).
The entries are:

Dec 31. Share Investments 30,000

Revenue from Share Investments 30,000
<To record 30% equity in net income)

Dec 31. Cash 12,000

Share Investments 12,000

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ACT1600 Fundamentals of Financial Accounting

Exercise 1:
Seizo Company owns 25% of Lotto Company. For the current year ended on December 31, 20 19,
Lotto reports net income of $180,000 and declares and pays a $50,000 cash dividend. Record
Seizo·s equity in Lotto·s net income and the receipt of dividends from Lotto.

Date Account title Debit Credit

!Valuing and Reporting Investments

The value of debt and share investments may fluctuate greatly during the time they are held. For
example, in one 12-month period, the share price of Unilever Company hit a high of $32.48 and
a low of $16.91. In light of such price fluctuations, how should companies value investment at
the Statement of Financial Position date?

Many experts argue that fair value offers the best approach among other available options
because it represents the expected cash realizable value of securities. Fair Value is the amount
for which a security could be sold in a normal market on any given day.

Icategories of Securities
For the purpose of valuing and reporting investments at Financial Statement date, Companies
classify Debt investments into two categories:
1. Trading securities are bought and held mainly for sale in the near future to generate
income on short-term price differences.
2. Held-for-collection securities are debt securities that the investor has the intent and
ability to hold to maturity.
Share Investments are also classified into two categories:
1. Trading securities (same as above)
2. Non-trading securities are held for purposes other than trading. For example, a company
may hold a share investment to sell a product in a particular area.

ITrading Securities (using Bonds as an example)

Trading means frequent buying and selling. Companies hold trading securities with the intention
of selling them in a short period of time, generally less than a month. At the end of each
accounting period companies adjust trading securities to fair value. The changes are reported as
unrealized gains or losses because the securities have not yet been sold.

Unrealized Gains or Losses= Total Cost- Total Fair Value

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 ACT1600 Fundamentals of Financial Accounting

The illustration below shows the cost and fair values for Trading securities of Club Corporation
on December 31. Club has an unrealized gain of $7,000 because the total fair value of $14 7,000
is greater than the total cost of$140,000.

TRADING SECURITIES, DECEMBER 31, 2019

Investments Cost Fair Value Unrealized Gain (Loss)

Yorkville Company bonds € 50,000 € 48,000 €(2,000)
Kodnk Company shares 90,000 99,000 9,000
Total €140,000 €147,000. € 7,000

The adjusting entry that Club will record in its books for this unrealized gain is:

Dec 31. Fair value adjustment- Trading 7,000

Unrealized Gain Income 7,000

NOTE: Fair value adjustment is debited to indicate an increase in Assets, and Unrealized Gain
is credited to indicate an increase in Revenue.

If Club Corporation had suffered an unrealized loss then the adjusting entry would be:

Dec 31. Unrealized Loss- Income XXX

Fair value adjustment- Trading XXX

INon-Trading Securities <using Shares as an example)

If the intent of a company is to sell the securities within the next year or operating cycle, the
investor classifies the securities as current assets in the Statement of Financial Position.
Otherwise, it classifies them as non-current assets in the investments section of the Statement of
Financial Position.
Companies report non-trading securities at fair value. The procedure for determining fair value and
the unrealized gain or loss for these securities is the same as for trading securities discussed earlier.

The illustration below shows the cost and fair values for Non-Trading securities of Indigo
Corporation on December 31. Indigo has an unrealized loss of $9,53 7 because the total fair value
of $284,000 is less than the total cost of $293,537.

Non-Trading Securities, December 31, 2019

Investments Cost Fair Value Unrealized Gain (Loss)
Campbell Soup Corporation
shares € 93,537 €103,600 €10,063
Hershey Company shares 200,000 180,400 (19,600)
Total €293,537 €284,000 € (9,537)

The adjusting entry that Indigo will record in its books for this unrealized loss is:

Dec 31. Unrealized Gain or Loss- Equity 9,537

Fair value adjustment- Non-Trading 9,537

Iflndigo Corporation had enjoyed an unrealized gain then the adjusting entry would be:

Dec 31. Fair value adjustment- Non-Trading XXX

Unrealized Gain or Loss-Equity XXX

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ACT1600 Fundamentals of Financial Accounting

Short-term Investments
Also called marketable securities, are securities held by a company that are
( 1) readily marketable and
(2) intended to be converted into cash within the next year or operating cycle, whichever
is longer. ·

Investments that do not meet both criteria are classified as long-term investments.

Pace Corporation
Statement of Financial Position (Partial)
Current assets
Cash $21,000
Short-term investments, at fair value 147,000

Presentation of Realized and Unrealized Gain or Loss

Other lncon1e and Expense
lntct-cst RcYenuc Unrealized Gain-! ncon1c
Dividend Revenue Loss on Sale of Investrnents
Gain on Sale of Investrnents Unrealized Loss-Incotne

Realized and Unrealized Gain or Loss

Unrealized gain or loss on non-trading securities are reported as a separate component of equity.

Equity
Share capital-ordinat-y £3,000,000
·Retained 1,500,000
Less: Unrealized loss on non-trading
scct..tritics

Classified Statement of Financial Position

Assets
lntangiblc assets
Goodwill € 270,000
Property, plant, and equipment
Land €200,000
B u ilcl i ngs €800,000
Less: Accumulnted dept·cciation-buildings 200,000 600,000
Equipment 180,000
Less: Accumulntecl dept·cciation-equipment 54,000 126,000
Total pt·opcrty, plant, and equipment 926,000
[nvesttnents
Investn1.ents in shares of less than 20°-0
owned cornpanies, at fair value 50,000
Investlnent in shares of 20-50% owned
con1pany, at 200,000

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ACT1600 Fundamentals of Financial Accounting

Problem 5: In January 2020, the management of Izmir Company concludes that it has sufficient
cash to permit some short-term investments in debt and share securities. During the year, the
following transactions occurred.
Feb 1 Purchased 600 ordinary shares of Joy for $32,400.
Mar l. Purchased 800 ordinary shares of Aurelius for $20,400.
Apr l. Purchased 50 $1,000, 7% Venice bonds for $50,000. Interest is payable semiannually on
April 1 and October 1.
July l. Received a cash dividend of$0.60 per share on the Joy ordinary shares.
Aug l. Sold 200 ordinary shares of Joy at $57 per share.
Sept l. Received a $1 per share cash dividend on the shares.
Oct I. Received the semiannual interest on the Venice bonds.
Oct 1. Sold the Venice bonds for $49,000.

At December 31, the fair value of the Joy ordinary shares was $55 per share. The fair value of the
Aurelius ordinary shares was $24 per share.
Instructions:
a) Journalize the transactions and post to the accounts Debt Investments and Share
investments into the T-account given below.
b) Prepare the adjusting entry at December 31, 2020, to report investment securities at fair
value. All securities are considered to be Trading-Securities.
c) Show the statement of financial position presentation of investment securities at
December 31, 2020.
a)

Date Account title Debit Credit

Feb I

Mar 1

Apr 1

July I

Aug 1

Sept 1

Oct I

Oct I

Share Investment A;c Debt Investment Ale

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ACT1600 Fundamentals of Financial Accounting

Security Cost Fair Value

Total

Adjusting entry:
Date Account title Debit Credit
Dec 31

C) Statement of financial position presentation of investment securities at December 31, 2020.

Problem 6: In January 2020, the management of Lek Company concludes that it has sufficient
cash to permit some short-tenn investments in debt and share securities. During the year, the
following transactions occurred
Feb 1. Purchased 500 ordinary shares of Jack for $30,800.
Mar 1. Purchased 600 ordinary shares of Augustine for $20,300.
Apr 1. Purchased 40 $1,000, 9%Ronald bonds for $40,000. Interest is payable semiannually on
April 1 and October 1.
July 1. Received a cash dividend of $0.60 per share on the Jack ordinary shares.
Aug 1. Sold 300 ordinary shares of Jack at $69 per share.
Sept 1. Received a $1 per share cash dividend on the Augustine ordinary shares.
Oct 1. Received the semiannual interest on the Ronald bonds.
Oct 1. Sold the Ronald bonds for $44,000.

At December 31, the fair value of the Jack ordinary shares was $66 per share. The fair value of
the Augustine ordinary shares was $29 per share.
Instructions
a) Journalize the transactions and post to the accounts Debt Investments and Share
investments into the T-account given below.
b) Prepare the adjusting entry at December 31, 2020, to report investment securities at fair
value. All securities are considered to be Trading Securities.
c) Show the statement of financial position presentation of investment securities at
December 3 l, 2020.
a)

Date Account title Debit Credit

Feb 1

Marl

Apr I

July I

Aug I

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 ACT1600 Fundamentals of Financial Accounting

Sept 1

Oct 1

Oct 1

Share Investment Ale Debt Investment A;c

Securities Cost Fair Value

-

Total

Adjusting entry:

I I

C) Statement of financial position presentation of investment securities at December 31, 2020.

Problem 7: On December 31, 2019, Eli Associates owned the following securities, held as a
long-term investment. The securities are not held for influence or control of the investee.

Ordinarv shares Shares Cost

Trowbridge Co. 2,000 $60,000
Holly Co. 5,000 45,000
Oriental Motors Co. 1,500 30,000

On December 31, 2019, the total fair value of the securities was equal to its cost. In 2020, the
following transactions occurred.
July 1. Received $1 per share semiannual cash dividend on Holly Co. ordinary shares.
Aug 1. Received $0.50 per share cash dividend on Trowbridge Co. ordinary shares.
Sept 1. Sold 1,500 ordinary shares of Holly Co. for cash at $8 per share.
Oct 1. Sold 800 ordinary shares of Trowbridge Co. for cash at $33 per share.
Nov 1. Received $1 per share cash dividend on Trowbridge Co. ordinary shares.
Dec 15. Received $0.50 per share cash dividend on Oriental Motors Co. ordinary shares.
Dec 31. Received $1 per share semiannual cash dividend on Holly Co. ordinary shares.

At December 31, the fair value per share of the ordinary shares were Trowbridge Co. $32, Holly
Co. $8, and Oriental Motors Co. $18.

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ACT1600 Fundamentals of Financial Accounting

Instructions
a) Journalize the transactions and post to the Share investments.
b) Prepare the adjusting entry at December 31, 2020, to report investment securities at fair
value. All securities are considered to be Non-Trading Securities.
a)

Date Account title Debit Credit

July 1

Aug 1

Sept 1

Oct 1

Nov l

Dec 15

Dec 31

Share Investment Ale

Security Cost Fair Value

Total

Adjusting entry:
Date Account title Debit Credit
Dec 31

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ACT1600 Fundamentals of Financial Accounting

Problem 8: On December 31, 2019, Hongkong Corporation owned the following securities, held
as a long-term investment. The securities are not held for influence or control of the investee.

Ordinarv shares Shares Cost

Threads Co. 4,000 $100,000
Harrod Co. 5,000 30,000
Osaka Co. 3,000 60,000

On December 31,2019, the total fair value of the securities was equal to its cost. In 2020, the
following transactions occurred.
July 1. Received $1 per share semiannual cash dividend on Harrod Co. ordinary shares.
Aug 1. Received $0.50 per share cash dividend on Threads Co. ordinary shares.
Sept 1. Sold 1,500 ordinary shares of Harrod Co. for cash at $8 per share.
Oct 1. Sold 600 ordinary shares of Threads Co. for cash at $30 per share.
Nov 1. Received $1 per share cash dividend on Threads Co. ordinary shares.
Dec 15. Received $0.50 per share cash dividend on Osaka Co. ordinary shares.
Dec 31. Received $1 per share semiannual cash dividend on Harrod Co. ordinary shares.

At December 31, the fair value per share of the ordinary shares were Threads Co. $23, Harrod
Co. $7, and Osaka Co. $19.
Instructions
a) Journalize the transactions and post to the Share investments.
b) Prepare the adjusting entry at December 31, 2020, to report investment securities at fair
value. All securities are considered to be Non-Trading Securities.
a)

Date Account title Debit Credit

July 1

Aug 1

Sept 1

Oct 1

Nov 1

Dec 15

Dec 31

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ACT1600 Fundamentals of Financial Accounting

Share Investment Ate

Securities Cost Fair Value

Total

Adjusting entry:
Date Account title Debit Credit
Dec 31

Problem 9: On December 31,2019, Europe Corporation owned the following securities that are

Investee Co Total Cost

Winsent $10,000

The Corporation had the following transactions related to securities during 2020.
Jan. 1 Purchased 1,000 shares ofMangMang ordinary shares for $40,800.
Apr.1 Purchased 60 $1,000, 9% SonSon bonds for $61,200 (including brokerage).
Interest is payable semi-annually on April 1 and October 1.
July.1 Received $1 per share cash dividends on the Winsent ordinary shares

Aug.1 Sold 500 shares ofWinsent ordinary shares for $6,250.

Oct. I Received the semi-annual interest on the SonSon bonds.

Oct. I Sold 50 SonSon bonds for $53,900.

Dec.1 Received $2 per share cash dividends on the MangMang ordinary shares.

Dec.31 Adjusted accrued interest revenue on the Son Son bonds.

Dec. 31 Prepare the adjusting entry to report the portfolio at fair value. Europe Corp.
classified the securities investments as trading securities.
. .
At December 31, 2020, the fmr value per share of the secunt1es were:
Winsent ordinary shares $14;share
MangMang ordinary shares $37;share
SonSon bonds $1, 1OO;bond
Instructions:
1. Prepare journal entries to record the above transactions and the adjusting entry at December
31, 2020, to report the pmtfolio at fair value.
2. Show the cost and fair values for all the securities investments owned by Europe Corporation
on December 31, 2020.

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ACT1600 Fundamentals of Financial Accounting

Date Account title Ref Debit Credit

Jan.l

Apr. 1

"

July 1

Aug. 1

Oct. 1

Oct. 1

Dec. 1

Dec. 31

Dec. 31

.
2 T ra d.mg secunT1es, Decem b er 31 2020
' Cost
Investments Fair value
Winsent Co. Shares
MangMang Co. Shares
SonSon Co. bonds

*****************

215