Question

Prepare an answer sheet with the column headings shown here. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on the appropriate balance sheet category and on net income by entering for each account affected the account name and amount and indicating whether it is an addition (+) or a subtraction (–). Transaction a has been done as an illustration. Net income is notaffected by every transaction. In some cases only one column may be affected because all of the specific accounts affected by the transaction are included in that category.

a. Accrued interest revenue of $30 on a note receivable.

b. Determined that the Allowance for Bad Debts account balance should be increased by $2,250.

c. Recognized bank service charges of $21 for the month.

d. Received $28 cash for interest accrued in a prior month.

e. Purchased 3 units of a new item of inventory on account at a cost of $32 each. Perpetual inventory is maintained.

f. Purchased 14 more units on account of the above item at a cost of $37 each. Perpetual inventory is maintained.

g. Sold 12 of the items purchased (in e and f) and recognized the cost of goods sold using the FIFO cost flow assumption. Perpetual inventory is maintained.

Transactions	Current assets	Current Liabilities	Stockholder's Equity	Net Income
a.	Interest receivable +30			Intrest revenue +30
b.
c.
d.
e.
f.
g.

Answer 1

A)

1. Increase in current assets of interest receivable +$30

2. Increase in net income +$30 revenue

B)

1. Current liabilities increase by $2250.

2. Net income reduced by $2250

C)

1. Current assets reduced because of decease in bank $21.

2. Net income decrease because of increase in bank charges expense.

D)

1. Cash received so current assets increased

2. Current assets decreased because accrued revenue received.

3. No effect on net income

E)

1.

Current assets increased because of purchase of inventory $96(32*$3)

2. Current liabilities increase because of new account payable. $96

F)

1. Current assets increased because increase in inventory $518

2. Current liabilities increase because of new account payable $518

G)

In perpetual inventory method average rate is calculated

Average rate of inventory = ($518+$96)/17 units = $36.12 per unit

Unit sold = 12 items

Cost of goods sold = 12*$36.12 = $433

1. Current assets decreased Because of sales $433

2. Net income increased Because of cost of goods sold.

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