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 not affected 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.

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

2. Determined that the Allowance for Bad Debts account balance should be increased by $2,150.

3. Recognized bank service charges of $23 for the month.

4. Received $26 cash for interest accrued in a prior month.

5. Purchased 5 units of a new item of inventory on account at a cost of $38 each. Perpetual inventory is maintained.

6. Purchased 11 more units on account of the above item at a cost of $43 each. Perpetual inventory is maintained.

7. Sold 9 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.

Answer 1

Journal Entries: Therefore, Debit $30 Effect on accounting equation: $2,150 $23 Transaction Account Titles a) Interest Receivable Interest Revenue b) Bad Debt Expense Allowance for Uncollectible Accounts c) Bank Service Charges Expense Cash d) Cash Interest Receivable e) Inventory Accounts Payable f) Inventory Cash g) Cost of Goods Sold Inventory Credit [Asset +] $30 [Equity +] [Equity - $2,150 [Asset -] [Equity - $23 [Asset -] [Asset +] $26 [Asset -] [Asset +] $190 [Liability +] [Asset +] $473 [Asset -] [Equity - $362 [Asset -] Transaction No. a) b) c) d) e) f) $26 Account Debited Type Effect Amount Asset + $30 Equity $2,150 Equity $23 Asset $26 Asset $190 Asset + $473 Equity $362 Account Credited Type Effect Equity + Asset Asset Asset Liability Asset Asset Amount $30 $2,150 $0 $26 $190 $473 $362 + $190 + + $473 $362 NOTE: FIFO stands for First-In-First-Out. Under FIFO method, inventory records are updated chronologically by recognizing cost of goods sold by assuming that inventories purchased first are sold first. For Transaction (e), Value of inventory purchased = 5 units x $38 = $190; For Transaction (f), Value of inventory purchased = 11 units x $43 = $473; For Transaction (g), Cost of goods sold = (5 x $38) + (4 x $43) = $362 under FIFO method.