CHAPTE R 2 Investing and Financing Decisions and the Balance Sheet 80

M2-2 Matching Definitions with Terms

LO1, 2, 3, 4 Match each definition with its related term by entering the appropriate letter in the space provided. There
should be only one definition per term (that is, there are more definitions than terms).

Term Definition
D (1) Journal entry A. Accounting model.
C (2) A = L + SE, and B. Four periodic financial statements.
Debits = Credits C. The two equalities in accounting that aid in providing
A (3) Assets = Liabilities + accuracy.
Stockholders’ Equity D. The results of transaction analysis in accounting
I (4) Liabilities format.
B (5) Income statement, balance sheet, E. The account that is debited when money is borrowed
statement of retained earnings, from a bank.
and statement of cash flows F. Probable future economic benefits owned by an entity.
G. Cumulative earnings of a company that are not
distributed to the owners.
H. Every transaction has at least two effects.
I. Probable debts or obligations to be paid with assets
or services.

M2-3 Identifying Events as Accounting Transactions

LO2 For each of the following events, which ones result in an exchange transaction for Dittman Company
(Y for yes and N for no)?
(1) Dittman Company purchased a machine that it paid for by signing a note payable.
(2) The founding owner, Megan Dittman, purchased additional stock in another company.
(3) The company borrowed $1,000,000 from a local bank.
(4) Six investors in Dittman Company sold their stock to another investor.
(5) The company lent $150,000 to a member of the board of directors.
(6) Dittman Company ordered supplies from Staples to be delivered next week.

M2-4 Classifying Accounts on a Balance Sheet

LO2 The following are accounts of Rosa-Perez Company:

(1) Accounts Payable (9) Long-Term Investments

(2) Accounts Receivable (10) Notes Payable (due in three years)
(3) Buildings (11) Notes Receivable (due in six months)
(4) Cash (12) Prepaid Rent
(5) Contributed Capital (13) Retained Earnings
(6) Land (14) Supplies
(7) Merchandise Inventory (15) Utilities Payable
(8) Income Taxes Payable (16) Wages Payable
In the space provided, classify each as it would be reported on a balance sheet. Use:
CA for current asset CL for current liability SE for stockholders’ equity
NCA for noncurrent asset NCL for noncurrent liability

M2-5 Determining Financial Statement Effects of Several Transactions

LO3 For each of the following transactions of Pitt Inc. for the month of January 2012, indicate the accounts,
amounts, and direction of the effects on the accounting equation. A sample is provided.
a. (Sample) Borrowed $20,000 from a local bank.
b. Lent $7,000 to an affiliate; accepted a note due in one year.
c. Sold additional stock to investors for $1,000 cash.
d. Purchased $15,000 of equipment, paying $6,000 cash and the rest on a note due in one year.
e. Declared and paid $2,000 in dividends to stockholders.
 CHAPTE R 2 Investing and Financing Decisions and the Balance Sheet 81

Assets = Liabilities + Stockholders’ Equity

a. Sample: Cash +20,000 Notes Payable +20,000

Identifying Increase and Decrease Effects on Balance Sheet Elements M2-6

Complete the following table by entering either the word increases or decreases in each column. LO4

Debit Credit
Assets INCREASE DECREASE
Liabilities DECREASE INCREASE
Stockholders’ equity DECREASE INCREASE

Identifying Debit and Credit Effects on Balance Sheet Elements M2-7

Complete the following table by entering either the word debit or credit in each column. LO4

Increase Decrease
Assets
Liabilities
Stockholder’s equity

Recording Simple Transactions M2-8

For each transaction in M2-5 (including the sample), write the journal entry in the proper form. LO4

Completing T-Accounts M2-9

For each transaction in M2-5 (including the sample), post the effects to the appropriate T-accounts and LO4
determine ending account balances. Beginning balances are provided.

Cash Notes Receivable Equipment

Beg. bal. 800 Beg. bal. 900 Beg. bal. 15,000

Notes Payable Contributed Capital Retained Earnings

Beg. bal. 2,700 Beg. bal. 5,000 Beg. bal. 9,000

Preparing a Simple Classified Balance Sheet M2-10

Starting with the beginning balances in M2-9 and given the transactions in M2-5 (including the sample), LO5
prepare a balance sheet for Pitt Inc. as of January 31, 2012, classified into current and noncurrent assets
and liabilities.

Computing and Interpreting the Current Ratio M2-11

Calculate the current ratio for Sal’s Pizza Company at the end of 2007 and 2008, based on the following data: LO5

Current Assets Current Liabilities

End of 2007 $240,000 $160,000
End of 2008 $260,000 $220,000
 E2-4
LO3

Determining Financial Statement Effects of Several Transactions

The following events occurred for Christensen Company:

a. Received investment of $34,000 cash by organizers and distributed stock to them.
b. Purchased $8,000 of equipment, paying $1,000 in cash and signing a note for the rest.
c. Borrowed $9,000 cash from a bank.
d. Loaned $500 to an employee who signed a note.
e. Purchased $15,000 of land; paid $4,000 in cash and signed a mortgage note for the balance
Required:
For each of the events (a) through (e), perform transaction analysis and indicate the account, amount, anddirection of the effect (+ for
increase and − for decrease) on the accounting equation. Check that the accounting equation remains in balance after each
transaction. Use the following headings:

Event Assets = Liabilities +

SE
A Stocks 34000Cash = 0 +
34000 stocks
B Buy 8000 equipment -1000 cash = 7000 N/p +
equipment 0
C Bank loan 9000 cash = 9000 bank loan +
0
D Employee loan -500 cash + 500 A/R = 0 +
from Co. 0
E Buy land +15000 Land-4000 cash = 11000 N/p +
0
Sum 61000 = 27000 +
34000
61000 =
61000

E2-11
LO4
Recording Journal Entries
Jefferson Corporation was organized on May 1, 2011. The following events occurred during the first month.
a. Received $65,000 cash from the five investors who organized Jefferson Corporation.
b. Ordered store fixtures costing $20,000.
a. Borrowed $10,000 cash and signed a note due in two years.
b. Purchased $13,000 of equipment, paying $1,500 in cash and signing a six-month note for the balance.
c. Lent $1,000 to an employee who signed a note to repay the loan in three months.
d. Received and paid for the store fixtures ordered in (b).
Required:
Prepare journal entries for each transaction. (Remember that debits go on top and credits go on the bot- tom, indented.) Be sure to
use good referencing and categorize each account as an asset (A), liability (L),or stockholders’ equity (SE). If a transaction does not
require a journal entry, explain the reason.
 a. Dr. Cash 65000
Cr Capital 65000

b. Dr. store fixtures 20000

Cr. Cash 20000

c. Dr. Cash 10000

Cr. Note payaple 10000

d. Dr. Equipment 13000

Cr. Cash 1500
Cr. Note payaple 11500

e. Dr. Account Receivable 1000

Cr. Cash 1000

f. I think same (b).

E2-17
LO4

Inferring Typical Investing and Financing Activities in Accounts

The following T-accounts indicate the effects of normal business transactions
Required:
1. Describe the typical investing and financing transactions that affect each T-account. That is, whateconomic events occur to
make each of these accounts increase and decrease?
2. For each T-account, compute the missing amounts.
answer
Equipment = investing Notes Receivable = investing N/P= financing
Equipment Notes Receivable Notes Payable
1/1 500 1/1 150 100 1/1
250 650 245 225 110 170
12/31 100 12/31 170 160 12/31

Identifying Expenses
The following transactions are July 2011 activities of Craig’s Bowling, Inc., which operates several bowl-ing centers (for games and
equipment sales). If expense is to be recognized in July, indicate the expense account title and amount. If expense is not to be
recognized in July, explain why.
Activity Expense Account Title and Amount
e. Craig’s sold bowling merchandise costing $3,890. 3890 Must recognized in July depends on
[The sale related to the use of this merchandise is in sales of 13000 (matching principle ) link
M3-3b.] between revenue (13000) and expense (3890)

f. Craig’s paid $1,900 on the electricity bill for June Not recognized in July because electricity
(recorded as expense in June). consumed in June.

g. Craig’s paid $4,700 to employees for work in July. Must recognized because work happened in
July like salary.
h. Craig’s purchased $1,800 in insurance for coverage just recognized 600$ because policy of
from July 1 to October 1. insurance paid for 3 months and expenses for
July expire. Or they use it
i. Craig’s paid $1,400 to plumbers for repairing a broken Must recognized plumber expenses 1400.
pipe in the restrooms.
j. Craig’s received the July electricity bill for $2,600 to Must recognized because electricity
be paid in August. consumed in July .
M3-5
LO4

Recording Revenues
For each of the transactions in M3-3, write the journal entry in good form
a) Dr. Cash 13000
Cr. Game service 13000

b) Dr. Cash 3000

Dr. A|R 4000
Cr. Sold Bowling 7000

c) Dr. Cash 2500

Cr. A|R 2500

d) Dr. Cash 2600

Cr.Unearned service 2600

E3-2
LO3

Reporting Cash Basis versus Accrual Basis Income Payson Sports, Inc., sells sports equipment to customers. Its fiscal year
ends on December 31. The following transactions occurred in 2012:
a. Purchased $314,000 of new sports equipment inventory; paid $90,000 in cash and owed the rest on account.
b. Paid employees $164,200 in wages for work during the year; an additional $4,800 for 2012 wages will be paid in January
2013. E3-1 LO1, 2, 3 E3-2 LO3 lib11021_ch03_100-161.indd 140 09/07/10 2:36 PM Confirming Pages
c. Sold sports equipment to customers for $630,000; received $520,000 in cash and the rest on account. The cost of the
equipment was $387,000.
d. Paid $17,200 cash for utilities for the year.
e. Received $35,000 from customers as deposits on orders of new winter sports equipment to be sold to the customers in
January 2013.
f. Received a $1,740 bill for December 2012 utilities that will be paid in January 2013. Required: 1. Complete the following
statements:
Accural Basis Cash Basis
Purchased of new sports equipment inventory (Expenses) 314000 90000

wages to employees (Expenses) 169000 164000

Sold sports equipment (Revenues) 630000 520000

cost of the equipment (Expenses) 387000 0

Paid cash for utilities (Expenses) 17200 17200

winter sports equipment (Revenues) 0 35000

Received a bill (Expenses) 1740 0

 Cash Basis Income Statement Accrual Basis Income Statement
Revenues Revenues
Cash sales 520000 Sales to customers 630000
Customer deposits 35000
------------- 555000
Expenses Expenses
Inventory purchases 90000 Inventory purchases 314000
Wages paid 164000 Cost of sales 387000
Utilities paid 17200 Wages expense 169000
---------- 271400 Utilities expense 17200
Received a bill 1740
--------------------- 888940
-
Net income 283600 Net income (258940)

E3-6
LO4
Determining Financial Statement Effects of Various Transaction
Wolverine World Wide, Inc., manufactures military, work, sport, and casual footwear and leather acces-sories under a variety of brand names,
such as Hush Puppies, Wolverine, and Bates, to a global market. The following transactions occurred during a recent year. Dollars are in
thousands.
a. Issued common stock to investors for $7,047 cash (example).
BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

(a) (example) +7,047 NE +7,047 NE NE NE

b. Purchased $765,472 of additional inventory on account.

BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

inventory +$765,472 +$765,472 NE NE NE NE

c. Borrowed $59,500.
BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

LOAN +$59,500 +$59,500 NE NE NE NE

d. Sold $1,220,568 of products to customers on account; cost of the products sold was $734,547.
BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

(a) (example) +$1,220,568 - NE +486.021 +$1,220,568 +$734,547 +486.021

$734,547
 e. Paid cash dividends of $20,758.
BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

dividends -$20,758 NE -$20,758 NE NE NE

f. Purchased for cash $24,126 in additional property, plant, and equipment.

BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

LAND +$24,126-$24,126 NE NE NE NE NE

g. Incurred $345,183 in selling expenses, paying three-fourths in cash and owing the rest on account.
BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

-258887.25 +86259.75 -$345,183 NE +$345,183 -$345,183

h. Earned $1,757 interest on investments, receiving 90 percent in cash.

BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

interest +1581.3+175.70 NE +$1,757 +$1,757 NE +$1,757

i. Incurred $2,850 in interest expense to be paid at the beginning of next year.

BALANCE SHEET INCOME STATEMENT
Stockholders’
Transaction Assets Liabilities Equity Revenues Expenses Net Income

(a) (example) NE +$2,850+$2,850 -$2,850 NE +$2,850 -$2,850

Required:
For each of the transactions, complete the tabulation, indicating the effect ( + for increase and – for decrease) of each
transaction. (Remember that A = L + SE, R – E = NI, and NI affects SE through Retained Earnings.) Write NE if there is no
effect. The first transaction is provided as an example.
138 CHAPTE R 3 Operating Decisions and the Income Statement

M3-3 Identifying Revenues

LO2, 3 The following transactions are July 2011 activities of Craig’s Bowling, Inc., which operates several
bowling centers (for games and equipment sales). If revenue is to be recognized in July, indicate the
revenue account title and amount. If revenue is not to be recognized in July, explain why.

Activity Revenue Account Title and Amount

a. Craig’s collected $13,000 from customers for
games played in July.
b. Craig’s sold bowling equipment inventory for
$7,000; received $3,000 in cash and the rest
on account. [The cost of goods sold (expense)
related to these sales is in M3-4e.]
c. Craig’s received $2,500 from customers on
account who purchased merchandise in June.
d. The men’s and ladies’ bowling leagues gave
Craig’s a deposit of $2,600 for the upcoming
fall season.

M3-4 Identifying Expenses

LO2, 3 The following transactions are July 2011 activities of Craig’s Bowling, Inc., which operates several bowl-
ing centers (for games and equipment sales). If expense is to be recognized in July, indicate the expense
account title and amount. If expense is not to be recognized in July, explain why.

Activity Expense Account Title and Amount

e. Craig’s sold bowling merchandise costing $3,890. 3890 Must recognized in July depends on
[The sale related to the use of this merchandise is in sales of 13000 (matching principle ) link
M3-3b.] between revenue (13000) and expense (3890)

f. Craig’s paid $1,900 on the electricity bill for June Not recognized in July because electricity
(recorded as expense in June). consumed in June.

g. Craig’s paid $4,700 to employees for work in July. Must recognized because work happened in
July like salary.
h. Craig’s purchased $1,800 in insurance for coverage just recognized 600$ because policy of
from July 1 to October 1. insurance paid for 3 months and expenses for
July expire. Or they use it
i. Craig’s paid $1,400 to plumbers for repairing a broken Must recognized plumber expenses 1400.
pipe in the restrooms.
j. Craig’s received the July electricity bill for $2,600 to Must recognized because electricity
be paid in August. consumed in July .

M3-5
LO4 Recording Revenues
For each of the transactions in M3-3, write the journal entry in good form.
M3-6
LO4 Recording Expenses
For each of the transactions in M3-4, write the journal entry in good form.
M3-7
LO4 Determining the Financial Statement Effects of Operating Activities Involving Revenues
The following transactions are July 2011 activities of Craig’s Bowling, Inc., which operates several bowl-
ing centers (for games and equipment sales). For each of the following transactions, complete the tabula-
tion, indicating the amount and effect (+ for increase and – for decrease) of each transaction. (Remember
that A = L + SE, R – E = NI, and NI affects SE through Retained Earnings.) Write NE if there is no
effect. The first transaction is provided as an example.
www.mhhe.com/libby7e
 If ~,
. !JI

e Dr. (?,.,~, uOr)~)

C~ . Bo»kkn IJ Ip Jto,.,r:,

C ✓• Gs.½ - - -- - - - - - - -
0 C AJ s F:xpf.+'\£1r I)rJ0

b.
Dr. AIR 300
Cc. sc1e Svviil-~ ( 3 000
Dr c, :C---& v¥.f \l"i~ L-

C\- \"-\f\~;,, ,~ \ b~

cc, ,i50
<De LJ~, ~oh{& ea~VI\St, lJb®
CC \f5 o'v
k.'
CC: ~IR \55
L
V>\. gt(- ~ V\. !iV,..(t() _' 'M • DY- CC)G~llf\~ 0
Cr:<;...\c..S-ns--.(w.J .1."l~ /AIME' e:r-. ,·V\v-.'T°'" \'-.\o
 \ \,,,·.... ~...., \ ...
l ~-~"
t\
~~
-.. \.

0
~"\\ f
- \ .
- f",
l\;~
A'f2.
o I
Ci~ ~0.1.-=,;.;;;;,;;;;;i-=---·
e,.~ n.
ll.($'
,, l~
.:1..1 ~" ~
"" ti \
" \~ ~~) ii)
... C\ l tf ' ~ 14.?-~
\1C <' .:- t lit•~ ·,
\,
•
\ ,-- ... \. :;.-- ~i}:.,\
~l~ .~ 1::. -~. S,\l
~ ' I
j
J '~("
l '-~' I'~.e--..
"" .=t\\~
i.~--i6\
' I~--

1.. \'.\bl R.~\

-

A. I c, --- or n ~\J... t:xr...s~ c.

8 -B o e:,.g O 1~-)s 0

- JJo,-,o 6'""""<>,..._..-- - - 15 ~o

E;;ce,.i.Q,-
~.B ~
----r----:Zc;5:y----~!::.!:x:lr--t---------- \ iJ.6~ --
1~\0

1 t:r-)
~~~t: - - -- - '6 ··•li.flt4,S
~:.;V'QJ..~B~""l:').:_- - - - --~4~~2)~'"'e, -~---

MA~
 .p

,! . , .' ~,~,

I Is
-\~-:o\l'-\0..._0. ~ bb { 8r'1 ', Sl>)uJ=.s) ).~ ,~ ,
= =-s=-,: ~o 1 I

:;a ____._&
_=:.~ ~~- - - - - - - - -------1--
::a ~t1.k:£~\l:.tM~l6- - - ------<;:, 6.1---=-4~o-"--"G-.____ _ _ __
~--e'---'- -w"+-~-....__
' ______..--- - ----:------
::;:a CB(:,.s '2:M lo
::a .A. . ....cl.=-c...____ _ ~5:::.o:. : . ."Q
. :=----- - - - - - -
::a &~½, l5otS
~ifs
:II ______ ____ ..:i.:..~O::::__ _ _ _ _ _ _ _ __
:II - - - - 4 -f\J~.~vf::.L...l[lb,UC.AA~lor:,)./-,,k= - --~>:!!t--Z'3:u:6i:::O~ - - - - - -
---------
:a ---------=------=---..t:::@)./J.s.~ --- - - - - - -
::11 - ~-----! 's. ..a~~
e'-:. ; =---~::::..fi___ia:.:.;.;;\I\Nl====w_ J.....:b:..lo(.:..::.B~r,=aaii ut~~::.. >
.:~ ~:J:Sl
~ r-3. .,. ;.:i..
1= 0
__;,
\ .:...'_ __ _ __

As~.d:?

:fl ____-r;;
_,:,_ . _ _ _ _L_
,-,-;;_,,,l_ l'1_'1_1_o _ _ __ _ _ _ _ _ __

:a 1 , °" bi1ai.;; '& Se

~/p l{q6'Q

:g _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ __
:a - - - - - - -- - - - -- - - - - ~
MA~
\uco~ :;__P,,!-i,,
I:> •• S ff· +\, .1.e.~1~.,~~.::.°'
,., t~4.)I~~\w /
...:..l===--- '_
1
_ __ _
~,u1
1

\ , - - ~,r,~~~v.\ul ~~;lt>.~ _ R,{E __ '1;'1..9<)~~~Q◄----

l'""'-\)_u\ \ 0-~--~ D ____ 0
~~~ i\~l~_i.4-6c.-o Q i.._~CJ-,,L _ __
l\Ld:~c,\,"t:. 1. ) 860 ~ 6~~- - -
~,, i C4\~-

!MA~