Problem Description:
Enter the following column headings across the top of a sheet of paper:
Transaction/ Owners' Net
Situation Assets Liabilities Equity Income
Enter the transaction / situation number in the first column and show the effect, if any, of the transaction entry or Adjusting entry on the appropriate balance sheet category or on the income statement by entering the amount and indicating whether it is an addition (+) or a subtraction (-). Column headings reflect the expanded balance sheet equation; items that affect net income should not be shown as affecting owners' equity. In some cases, only one column may be affected because all of the specific accounts affected by the transaction are included in that category. Transactions a and b have been provided as illustrations; you should note that each of the remaining items (c-k) require only one transaction or adjustment.
Note: As an alternative to using the horizontal model, you may write the journal entry for each transaction or adjustment.
Instructions:
Please proceed to the "Analysis" worksheet and complete the basic problem requirements. Complete the problem requirements by entering appropriate amounts or formulas in shaded worksheet cells:
a. During the month, Supplies Expense was debited $1,800 for supplies purchased. The cost of supplies actually used during the month was $1,400.
b. During the month, Supplies (asset) was debited $1,800 for supplies purchased. The total cost of supplies actually used during the month was $1,400.
c. Received $800 of cash from clients for services provided during the current month.
d. Paid $500 of accounts payable.
e. Received $300 of cash from clients for revenues accrued at the end of the prior month.
f. Received $900 of interest income accrued at the end of the prior month.
g. Received $1,200 of interest income for the current month.
h. Accrued $700 of interest income earned in the current month.
i. Paid $1,900 of interest expense for the current month.
j. Accrued $600 of interest expense at the end of the current month.
k. Accrued $2,500 of commissions payable to sales staff for the current month.
Notice the net effect of items a and b is the same: both assets and net income decrease by the $1,400 of supplies used during the month.
After completing the "Analysis" worksheet, please proceed to the "What the Numbers Mean" worksheet and respond to the additional requirements presented.
Question 1: In both transactions c and e, cash is received from clients. Explain why net income is increased by transaction c, but is not affected by transaction e.
Question 2: Transactions f, g, and h all relate to interest income. Yet, transaction f does not affect net income, while transactions g and h both increase net income. Explain why this is the case by making reference to accrual accounting. Similarly, transaction h does not affect cash, while transactions f and g both increase cash. Explain why this is the case, by again making reference to accrual accounting.
Complete the Modeling:
a. During the month, Supplies Expense was debited $1,800 for supplies purchased. The cost of supplies actually used during the month was $1,400.
b. During the month, Supplies (asset) was debited $1,800 for supplies purchased. The total cost of supplies actually used during the month was $1,400.
c. Received $800 of cash from clients for services provided during the current month.
d. Paid $500 of accounts payable.
e. Received $300 of cash from clients for revenues accrued at the end of the prior month.
f. Received $900 of interest income accrued at the end of the prior month.
g. Received $1,200 of interest income for the current month.
h. Accrued $700 of interest income earned in the current month.
i. Paid $1,900 of interest expense for the current month.
j. Accrued $600 of interest expense at the end of the current month.
k. Accrued $2,500 of commissions payable to sales staff for the current month.