P1-1A. Analyze business transactions and the effect on the financial statements.

The following transactions apply to Small’s Appliance Service Company during May 2007.
1. The owner started the business by depositing $5000 in a business checking account on May
1.
2. The company provided services to clients and received $3500 in cash.
3. The company borrowed $1200 from the bank for the business.
4. The company paid $1000 of salaries expense.
5. The company purchased a new computer for $3000 cash to use to keep track of its customers.
6. The company made a distribution of $1500 to the owner.
Required
a) Study each of the transaction. Consider what is happening to assets in each case. What are
the total assets of the company at the end of May 2007? (You may want to use the accounting
equation to help you.)
b) Consider what is happening to the liabilities in each transaction. What are the total liabilities
of the company at the end of May 2007?
c) Classify each transaction as operating, investing or financing.
d) What was net income for May?
e) Based on data provided, who might find the information on Small’s Appliance Services
Company’s financing statement useful?

Solution

a)
Study each of What is
Transaction transactions happening to
assets?

1 The owner started the business by depositing $5000 in a business Assets and Cash – increase
checking account on May 1. owner’s equity

2 The company provided services to clients and received $3500 in cash. Assets and Account
owner’s equity Receivable –
increase

3 The company borrowed $1200 from the bank for the business. Assets and Cash – increase
liability

4 The company paid $1000 of salaries expense. Assets and Cash – decrease
owner’s equity

5 The company purchased a new computer for $3000 cash to use to keep Assets Cash – decrease
track of its customers. Equipment –
increase

6 The company made a distribution of $1500 to the owner. Assets and Cash – decrease
owner’s equity
Accounting Equation

Small’s Appliance Services Company

Balance Sheet
May 2007

Assets
Cash ……………………………………………………………………………………….. $4200
Equipment ……………………………………………………………………………….... $3000
Total Assets …………………………………………………………………………..…… $7200

Liabilities
Loans payable …………………………………………………………..………………… $1200
Total Liabilities …………………………………………………………………………… $1200

Owner’s Equity
Common stock ……………………………………………………………………………. $5000
Retained earnings
Service revenue ………………………………………………………………………….... $3500
Salary expanses ………………………………………………………………………..... ($1000)
Distribution equity ……….………………………………………………………..……...
($1500)
Total Owner’s Equity ……………………………………………………..………………. $6000
Total Liabilities and Owner’s Equity ………………………………………..……………. $7200

∗ Base on balance sheet, the total assets of the company at the end of May 2007 is $7200
a)
Transaction What is happening to liabilities?

1 The owner started the business by depositing $5000 in a business Not affected
checking account on May 1.

2 The company provided services to clients and received $3500 in cash. Not affected

3 The company borrowed $1200 from the bank for the business. Loans payable – increase

4 The company paid $1000 of salaries expense. Not affected

5 The company purchased a new computer for $3000 cash to use to keep Not affected
track of its customers.

6 The company made a distribution of $1500 to the owner. Not affected

Small’s Appliance Services Company

Balance Sheet
May 2007

Assets
Cash ……………………………………………………………………………………….. $4200
Equipment ……………………………………………………………………………….... $3000
Total Assets …………………………………………………………………………..…… $7200

Liabilities
Loans payable …………………………………………………………..………………… $1200
Total Liabilities …………………………………………………………………………… $1200

Owner’s Equity
Common stock ……………………………………………………………………………. $5000
Retained earnings
Service revenue ………………………………………………………………………….... $3500
Salary expanses …………………………………………………...……………………... ($1000)
Distribution equity ………….……………………………………………………..……...
($1500)
Total Owner’s Equity ……………………………………………………..………………. $6000
Total Liabilities and Owner’s Equity ………………………………………..……………. $7200
∗ Base on balance sheet, the total liabilities of the company at the end of May 2007 is $1200

a)
Transaction Transaction classify

1 The owner started the business by depositing $5000 in a business Financing

checking account on May 1.

2 The company provided services to clients and received $3500 in cash. Operating

3 The company borrowed $1200 from the bank for the business. Financing

4 The company paid $1000 of salaries expense. Operating

5 The company purchased a new computer for $3000 cash to use to keep Investing
track of its customers.

6 The company made a distribution of $1500 to the owner. Financing

b)

Small’s Appliance Services Company

Income Statement
For the end of May 2007

Service revenue ………………………………………………………………………..….. $3500

Expenses
Salary expenses …...…………………………………………………………………....... ($1000)
Net income …………………………………………………...…………………………… $2500

∗ Net income for May 2007 is $2500

a) The Accountant of the company is the one who might find the information on Small’s
Appliance Service Company’s financial statement.
P1-2B. Analyze business transaction and the effect on the financial statement.
The following events are for Southeast Sandblasting Company, for the year 2006, the first year
of operations.
1. A group of friends began the company with a total investment of $54000.
2. Southeast Sandblasting Company rented sandblasting equipment for a year and paid cash of
$30000.
3. Southeast Sandblasting Company provided sandblasting services to the local community
college and received $60000.
4. Southeast Sandblasting Company paid operating expenses amounting to $25000.
5. Southeast Sandblasting Company borrowed $15000 from a local bank.
6. Southeast Sandblasting Company paid dividends of $5000 to shareholders.
Required
a) For each transaction listed, indicate whether the balance sheet or income statement is effected
by the transaction and then explain how it is affected. For example, the first transaction
affects the balance sheet by increasing Cash and increasing owners’ equity.
b) What is net income for the year ended December 31, 2006?
c) What is the balance in the cash account at December 31, 2006?

Solution

a)
Transaction Is the balance sheet or Explain of affected
income statement affected?

1 A group of friends began the company with a Balance sheet affected Cash – increase
total investment of $54000.
Owners’ equity – increase

2 Southeast Sandblasting Company rented Balance sheet affected Cash – decrease

sandblasting equipment for a year and paid cash
 of $30000. Prepaid equipment –
increase

3 Southeast Sandblasting Company provided Balance sheet and income Account receivable –
sandblasting services to the local community statement affected increase
college and received $60000.
Service revenue – increase

4 Southeast Sandblasting Company paid operating Balance sheet and income Cash – decrease
expenses amounting to $25000. statement affected
Operating expenses –
increase

5 Southeast Sandblasting Company borrowed Balance sheet affected Cash – increase

$15000 from a local bank.
Loans payable – increase

6 Southeast Sandblasting Company paid dividends Balance sheet affected Cash – decrease
of $5000 to shareholders.
Dividends acc. – decrease

b)
Southeast Sandblasting Company
Balance Sheet
For the year December 31, 2006
Assets
Cash …………………………………………………………………….…………… $69000
Prepaid rent ……...……………………………………………………………….......$30000
Total Assets …………………………………………………………………….…… $99000

Liabilities
Loans payable ……………………………………………………………………….. $15000
Total liabilities …………………………………………………………………….… $15000

Owners’ equity
Common stock ……………………………………………………………………..... $54000
Service revenue ……………………………………………………………………… $60000
Operating expenses …...……………………………………………………………. ($25000)
Dividends …………………………………………………………...…………….... ($ 5000)
Total owners’ equity ……………………………………………………………...…. $84000
Total liabilities and owners’ equity ……………………………………………….…. $99000
 Southeast Sandblasting Company
Income statement
For year December 31, 2006

Revenue
Service revenue ………………………………………………………..………………… $60000
Expenses
Operating expenses ……………………………………………………...…………...… ($25000)
Net income ………………………………………………………………………………. $35000

Net income for the year ended December 31, 2006 is $35000

c)
Southeast Sandblasting Company
Statement of cash flows
For year December 31, 2006
Cash from operating activity
Receive from services ……………………………………………………..…….
$60000
Paid for operating expenses ………………………………………...….……….
($25000)
Cash from investing activity
Paid cash rental equipment ………………………………………………..……
($30000)
Cash from financing activity
Received from group member ……………………………………………..……
$54000
Loan from bank …………………………………………………………...……..
$15000
Paid dividends to shareholder ………………………………………..…………
($5000)
Net increase in cash ……………………………………………………………...…. $69000
Beginning cash balance …………………………………………………………….. –
Ending cash balance ……………………………………………………………...… $69000
P3-4B. Post to T-accounts and prepare a trial balance.
Meyer Service Corporation started its fiscal year with the accounts and balances shown. Then,
the company engaged in the following transactions.
Retained Earnings …………...…. $11000
Prepaid Rent …………..……..….. $3000
Land ……………..……………… $3000
Common stock …………..……… $7000
Accounts Receivable ….…….….. $6000
Accounts Payable ……….……… $3500
Cash ………………….……….… $5000
Supplies ……………….…..…….. $4500
Transaction during Meyer Service Corporation’s fiscal year were:
1. Issued additional stock for $20000.
2. Purchased supplies for $15000 on account.
3. Earned service revenues of $14500 on account.
4. Paid cash for $8650 of operating expenses incurred.
5. Borrowed $5600 from a local bank to be repaid next year.
6. Collected $15500 on accounts receivable.
7. Paid $10000 on accounts payable.
Required
a) Prepare a beginning trial balance from the accounts and balance listed previously.
b) Set up T-accounts and insert the beginning balance. (Use BB to indicate beginning balances).
Then, post the transaction to the T-accounts.
c) Prepare an ending trial balance.

Solution
a)
Meyer Services Corporation
Trial Balance
Accounts Dt Cr

Cash $5000
Supplies $4500
Account receivable $6000
Land $3000
Prepaid rent $3000
Account payable
$3500
Common stock
$7000
Retained earnings
$11000
 $21500
$21500
b)
Cash Supplies Acc. receivable
BB $5000 $8650 BB $4500 BB $6000 $15500
$20000 $10000 $15000 $14500
$5600 $19500 $5000
$15500

Land Prepaid rent Acc. Payable

BB $3000 BB $3000 $10000 $3500 BB

$3000 $3000 $15000

$5600

Common stock Retained earnings Service revenue Operating expenses

$7000 BB $11000 BB $14500 $8650

$20000 $11000 $14500 $8650

$27000

c)

Mayer Service Corporation

Trial Balance

Accounts Dt Cr

Cash $27450

Supplies $19500

Account receivable $5000

Land $3000

Prepaid rent $3000

Accounts payable
$14100

Common stock
$27000
Retained earnings
$11000

Service revenue
$14500

Operating expenses $8650

$66600
$66600

P3-5B. Record journal entries, post to T-accounts, prepare a trial balance and financial
statement and calculate working capital and quick ratio.
The balance sheet for Prison Service at May 31 is shown below, followed by the transactions for
June.
Prison Services
Balance Sheet
At May 31, 2007
Assets
Cash $75870
Account receivable $46760
Short-term notes receivable $50000
 Equipment $120000
$292630
Liabilities and Equity
Accounts payable $52700
Short-term note payable $25780
Common stock $73560
Retained earnings $140590
$292630
These transactions took place during June:
June 1 Collected $40000 in cash on May 31 accounts receivable.
6 Paid employee salaries of $24500
10 Received $54900 in cash for service provided.
14 Paid $50000 on accounts payable.
18 Paid rent for June, $3200.
24 Provided services to customers on account, $32750.
27 Paid $14200 for employee salaries, $4,100 for utilities and $2675 in other
expenses.
30 Paid $2000 cash dividends.

Required
a) Set up T-accounts with beginning balances taken from the May 31 balance sheet. (Use BB to
indicate beginning balance.)
b) Journalize and post the June transaction to the T-accounts.
c) Prepare a trial balance at June 30.
d) Prepare the four basic financial statements. [Note to instructor: These will be unadjusted
financial statements.
e) Calculate the working capital and quick ratio and explain what each measures.

a)
Cash Acc. Receivable Short-term note receivable
BB $75870 BB $46760 BB $50000
$75870 $46760 $50000
 Equipments Account payable Short-term notes payable

BB $120000 $52700 BB $25780 BB

$120000 $52700 $25780

Common stock Retained earnings

$73560 BB $140590 BB

$73560 $140590

b)
General Journal
Date Transaction Dt Cr

June 1 Cash $40000

Accounts receivable
$40000
To record cash, received from accounts receivable
June 6 Salaries expenses $24500
Cash
$24500
To record payment for salaries expenses
June 10 Cash $54900
 Service revenue
$54900
To record service revenue
June 14 Accounts payable $50000
Cash
$50000
To record payment for accounts payable
June 18 Rent expenses $3200
Cash $3200
To record payment for rental expenses
June 24 Accounts receivable $32750
Service revenue
$32750
To record service revenue
June 27 Salaries expenses $14200
Utility expenses $4100
Others expenses $2675
Cash
$20975
To record on salaries expenses, utility expenses, others expenses
June 30 Dividends $2000
Cash $2000
To record on dividends

Cash Acc. Receivable Short-term note receivable

BB $75870 $24500 BB $46760 $40000 BB $50000
$40000 $50000 $32750
$54900 $3200 $39510 $50000
$20975

$2000

$70095

Equipments Account payable Short-term notes payable

BB $120000 $50000 $52700 BB $25780 BB

$120000 $2700 $25780

Salaries expenses Common stock Retained earnings Service revenue

$24500 $73560 BB $140590 BB

$54900

$14200 $73560 $140590

$32750

$38700
$87650

Rent expenses Utility expenses Other expenses Dividends

$3200 $4100 $2675 $2000

$3200 $4100 $2675 $2000

c)
Prison Servises
Trial Balance
June 30
Accounts Dt Cr

Cash $70095
Accounts receivable $39510
Short-term notes receivable $50000
Equipments $120000
Accounts payable $2700
Short-term notes payable
$25780
Common stock
$73560
Retained earnings $140590
Service revenue
$87650
Salaries expenses $38700
Rental expenses $3200
Utility expenses $4100
Others expenses $2675
Dividends $2000
$330280
$330280

d)
Prison Services
Balance Sheet

Assets
Cash …………………………………………………………………………...………… $70095
Accounts receivable ……………………………………………………………………... $39510
Short-term notes receivable ……………………………………………………………..…$50000
Equipments …………………………………………………………………………….. $120000
Total assets …………………………………………………………………………..…. $279605

Liabilities
Accounts payable …………………………………………………………………………. $2700
Short-term notes payable ……………………….....................................................…….. $25780
Total liabilities …………………………………………………………………………... $28480

Owners’ Equity
Common stock ……………………………………………………………………..……. $73560
Retained earnings ………………………………………………………………….…… $140590
Service revenue ………………………………………………………………………….. $87650
Salary expenses ……………………………………………………………………..…. ($38700)
Rent expenses ………………………………………………………………………….... ($3200)
Utility expenses …………………………………………………………………….…… ($4100)
Others expenses …………………………………………………………………….…… ($2675)
Dividends ……………………………………………………………………………..… ($2000)
Total owners’ equity …………………………………………………………………… $251125
Total liabilities and owners’ equity …………………………………………………….. $279605

Prison Services
Income statement

Revenue
Services revenue …………………………………………………………...……………. $87650
Expenses
Salaries expenses …………………………………………………………………...…… $38700
Rental expenses ………………………………………………………………………….... $3200
Utility expenses …………………………………………………………………………… $4100
Other expenses ……………………………………………………………………………. $2675
Net income …………………………………………………………………………….… $38975

Prison Services
Statement of Changes in Shareholders’ Equity

Contribute Capital
Beginning balance ……………………………………………………………………..… $73560
Contributions during the month …………………………………………………………. –
Ending balance ………………………………………………………………………...… $73560
Retained earnings
Beginning balance ……………………………………………………………………… $140590
Net income ………………………………………………………………………………. $38975
Dividends ……………………………………………………………………………..… ($2000)
Ending balance …………………………………………………………………………. $177565
Total Owners’ Equity ………….……………………………………………………….. $251125

Prison Services
Statement of Cash Flows

Cash from operating activity

Collected in cash from accounts receivable ……………………… $40000
Paid employee salaries …………………………………………... ($24500)
Received cash for services provided ……………………………... $54900
Paid rent ………………………………………………………….. ($3200)
 Paid employee salaries …………………………….…………….. ($14200)
Paid utilities ………………..……………………………………... ($4100)
Paid others expenses ………………………..…………………….. ($2675)
Paid accounts payable …………………………………………… ($50000)
Net cash from operating activity …………………………………………………………($3775)
Cash from financing activity
Paid dividends …………………………………………………… ($2000) ($2000)
Net Increase (decrease) in cash ………….…………………………………..………… ($5775)
Add beginning cash ……………………………………………………..…………….. $75870
Ending cash balance ………………………………...………………………………... $70095

e)
Working Capital = Current Assets - Current Liabilities
Working Capital = $159605 - $28480
Working Capital = $131125

Quick Ratio
Short-term investments = Cash + Accounts receivable
 = $70095 + $39510
= $109605

Current liabilities = Accounts payable + Short-term notes payable

= $2700 + $25780
= $28480

Quick Ratio = Short-term Investments

Current liabilities
= $109605
$28480
= 3.85