Solutions Manual to accompany Accounting 9 Edition John Hoggett

103 Pages·2017·1.92 MB·English

by  John Hoggett

Instant download and all chapters Solutions Manual to accompany
Accounting 9 Edition John Hoggett
https://testbankdata.com/download/solutions-manual-accompany-
accounting-9-edition-john-hoggett/

CHAPTER 3
RECORDING TRANSACTIONS

DISCUSSION QUESTIONS

SOLUTIONS

1. Indicate whether each of the following events is an internal transaction, an external
transaction, or a non-transaction event. Explain your answer in each case:
(a) Receipt of money from a customer in payment of services to be provided early in
the next accounting period.
(b) Equipment is used to provide a service for a customer
(c) The human resources department provided services to the customer service
department.
(d) A building owned by the business increased in value
(e) Received payment from a customer on account for services provided in the
previous accounting period.
(f) A prospective employee is interviewed and hired for a job
(g) Stationery supplies are used by an employee.

(a) External, because an event has happened between the entity and an outside party. Even
though no service has yet been provided the receipt of money means that the entity now
has a liability to either provide the service in the future or return the money. This needs to
be recorded immediately.
(b) External and Internal. Even though the equipment has been used in the performance of a
service to an outside party (external), the usage and wearing out of the equipment is
usually recorded as an internal adjustment by way of depreciation on the equipment.
(c) Internal, as there needs to be a record kept within the entity of the provision of services
between departments so that the cost of running each department may be accurately
determined.
(d) Non-transaction event. However, if it is the practice of an entity to revalue such assets to
show the higher value of the building, it would be recorded as an internal transaction, as
there is no outside party involved.
(e) External, as there is an external party directly involved. Even though the provision of
services would have been recorded in the previous period along with accounts receivable,
the receipt of cash affects the cash at bank and reduces accounts receivable in the current
period.
Chapter 3: Recording transactions
(f) Non-transaction event, which is not recorded until an employee has begun work and has
provided services to the entity
(g) Internal, as there is merely an adjustment inside the entity to reflect a change in value due
to supplies being used. No external party is involved.

2. The owner of a very small, part-time business is very disorganised and doesn’t like filing
invoices, accounts and receipts. ‘What is the point of keeping all that paper work?’, he
asks. ‘Once the details have been recorded in the accounting system why waste time and
space filing everything?’ Explain to the small business owner why it is important to keep
supporting documentation and how such records are likely to be useful for future decision
making and provide an example.
There are two main reasons for keeping supporting documentation:
a. It provides evidence of transactions and supports the entries into the accounting
record;
b. It serves as an important element in the control of the business’ resources, as
discussed in the Business Knowledge section.
The documentation would assist decision making as it usually provides details that are not
recorded in the accounting system. For example, an electricity account will not only show the
amount to be paid (expense) that would be recorded in the accounting system but also the amount
of electricity being used. The amount of electricity used is not usually recorded in the accounting
system, but being able to monitor this over time would help the business to control and reduce its
power usage. If disputes ever arise with a supplier then supporting documentation is also likely to
contain more detailed information to help resolve the issue than the accounting records would
provide.

3. One often hears the statement: ‘Debits are bad and credits are good for the business.’ Do
you agree? Why or why not?
This statement is nonsense. The debits and credits are merely double-entry rules for recording
transactions and events. Even though expenses may be ‘debit’, so too are assets. ‘Debit’ implies
neither good or bad. Likewise for credits, which can be revenues or liabilities or equity.

4. Your friend is having difficulty grasping the rules of debits and credits. Using the idea
that in some countries vehicles must travel on the left hand side of the road while in
others they must travel on the right hand side of the road to explain the rules of debit and
credit.
In some countries, such as Australia, Hong Kong, Malaysia and Britain, vehicles must travel on the
left hand side of the road. This is similar to Asset and Expense accounts which are increased with a
debit, an entry on the left hand side of the general ledger account. In other countries, such as
America, China and Europe, vehicles must travel on the right hand side of the road. This is similar
to Liability, Equity and Income accounts which are increased with a credit, an entry on the right
hand side of the general ledger account. There are historical reasons why in some countries
vehicles travel on the left while in others they travel on the right. Similarly there are historical
reasons why a debit is on the left of an account and is used to increase Assets and Expenses but
decrease Liabilities, Equity and Income, and why a credit is on the right of an account and is used
to increase Liabilities, Equity and Income but to decrease Assets and Expenses. Regardless of the
historical reasons it is important to follow the rules, whether they are road rules or debit and credit
rules, otherwise you will get into difficulty. A crash on the roads and incorrect accounts in
accounting. In Australia we don’t ask ‘why?’ we drive on the left, we simply do so to avoid
accidents. In China we don’t ask ‘why?’ we drive on the right, we just do so to keep out of trouble.
This approach to debits and credits is often useful when first learning the rules of accounting.

5. Why are journals required as part of the recording process? Would not a set of ledger
accounts be sufficient?
Journals provide a chronological record of transactions and events affecting an entity. The general
ledger does not, but classifies like transactions similarly. Hence, the purposes of the journal and
ledger are different, but complement each other.

3.1
Chapter 3: Recording transactions
6. Give an example of a transaction that results in:
(a) An increase in one asset and an increase in a liability
(b) A decrease in one asset but no change in the total assets
(c) An increase in one asset and an increase in equity
(d) A decrease in one asset and a decrease in a liability
(e) A decrease in one asset and a decrease in equity
(f) One asset increasing, one asset decreasing and one liability increasing
(g) A decrease in equity and an increase in a liability

(a) Purchase of stationery on credit from a supplier which would increase Stationery
Supplies Inventory and increase Accounts Payable.
(b) Examples are purchase of supplies for cash and the collection of money from a
customer who was part of accounts receivable.
(c) The owner contributing an asset to the business such as cash or equipment or land or
buildings. Earning income would increase either cash at bank or accounts
receivable and also increase income, which by definition is an increase in equity.
(d) Paying a supplier for goods or services purchased on credit would reduce cash at bank
as well as the accounts payable.
(e) If the owner took cash from the business bank account this would reduce cash at bank
and equity by increasing drawings. Paying cash for an expense incurred by the
business would .reduce the asset cash at bank and reduce equity by increasing
expenses which are defined as decreases in equity.
(f) Purchase of an asset (such as equipment or a building) in which a part payment is
made and the balance of the purchase price is borrowed from a bank or finance
company
(g) The incurrence of an expense on credit or which is not yet paid for e.g. wages expense
and wages payable.

7. Recently, a new student of accounting was overheard making the following remarks:
‘Why are we learning how to use the double-entry system of recording in the accounting
cycle? Surely there are good computer packages available these days which can handle
all of these details.’ Provide a suitable reply.
Students must know the accounting cycle manually so that they can determine what a
computer package is doing in the accounting cycle, and so that they can correct any
intentional and unintentional discrepancies which can arise from time to time in computer
packages. Furthermore, some packages have their limitations and it is wise for the student
to know what a package can and cannot do for the entity concerned. Much of this
knowledge can be gained by preparing a set of accounts both manually and on computer.
Furthermore, in practice, some small clients still do not use computers to keep their
accounting records.
By learning how to prepare accounts manually students learn the relationship between
transactions in an entity and how they impact on the financial statements. Although this
may be possible with a computer package the relationship is not as obvious. An
accountant with experience should be able to look at the financial statements produced by
a computer and tell if they are reasonable given their knowledge of the business.
Understanding the accounting process in the detail required to be able to prepare manual
accounts assists in developing these decision making skills.

8. Explain the fact that errors can exist even though the sum of the debit account balances
may equal the sum of the credit account balances in the trial balance.

Many errors do not affect the equality of debits and credits. Examples are an entry posted
twice, or not at all, a debit or credit posted to the wrong account, or the wrong amount
posted to both accounts.
3.2
Chapter 3: Recording transactions

9. Explain why when a business pays GST on the purchase of goods or services it records
this as GST Receivable and an asset. When a business provides goods or services which
are taxable it records the GST component of the transaction as GST Payable, a liability.
When a business pays GST on purchasing goods or services it is allowed to offset this
against and GST it owes to the Australian Taxation Office (ATO). The amount is called
GST Receivable as it is either receivable from the ATO if the amount of GST paid
exceeds the amount that the business receives from its customers or it at least reduces the
amount of GST it has to pay to the ATO. The future economic benefit controlled by the
entity that makes GST Receivable an asset is a reduction in future cash outflows to the
ATO by reducing the amount of GST it has to forward to the ATO.
When a business provides goods and services which are taxable under the GST legislation
it is in effect collecting tax on behalf of the ATO which it is then liable to forward to the
ATO. This is why this GST is called GST Payable and is a liability as it will result in a
future cash outflow to the ATO.

10. The accountant of a goldmining company in Western Australia has to make a decision
about whether to record an accounting transaction or not. The goldmining company
discovered an extremely rich seam of gold as a result of exploration activities, 50
kilometres away from its already existing mines. This information, when released to the
public, caused the share price of the company to jump considerably. What entries (if any)
should the accountant make in the ledger of the company? Why?

The accounting records for equity do not show increases in the market prices of the
entity’s shares in the financial statements. Hence, no entries are made for the increase in
share prices. However, we need to consider as well whether the entity should recognise
the existence of the new seam of gold as an asset. Consider this aspect in relation to the
definition of an asset as presented in the text.

3.3
Chapter 3: Recording transactions
EXERCISE SOLUTIONS

Exercise 3.1 Identifying account categories

The following is a list of ledger account titles extracted from the general ledger of J. Wendall,
marketing consultant:

Wages and Salaries Motor Vehicles
Interest Rent
Cash at Bank Mortgage Payable
J. Wendall, Capital Consultancy Fees
Accounts Payable Investments
Land (Under Mortgage) Computers
Furniture Inventory, Marketing Materials
Accounts Receivable

Required
A. Identify each of the ledger accounts as either an asset, a liability, an income or an
expense account. If you think that any of the accounts might fit into more than one of
these categories, explain why.
B. For each of the accounts listed, indicate (a) whether increases are recorded as debits or
credits and (b) whether the normal balance is a debit or a credit.

B.(b)
B.(a) Normal
A. Increases balance
1. Wages and Salaries – Expense debit debit
2. If Interest Revenue – Income credit credit
If Interest Expense – Expense debit debit
3. Cash at Bank – Asset debit debit
4. J. Wendall, Capital – Equity credit credit
5. Accounts Payable – Liability credit credit
6. Land (under mortgage) – Asset debit debit
7. Furniture – Asset debit debit
8. Accounts Receivable – Asset debit debit
9. Motor Vehicles – Asset debit debit
10. If Rent Revenue – Income credit credit
If Rent Expense – Expense debit debit
11. Mortgage Payable – Liability credit credit
12. Consultancy Fees – Income credit credit
13. Investments – Asset debit debit
14. Computers – Asset debit debit
15. Inventory, Marketing Materials – Asset debit debit

3.4
Chapter 3: Recording transactions
Exercise 3.2 Transaction analysis

For each of the following transactions, indicate whether the accounts affected are an asset, a
liability, an equity, an income or an expense. Also indicate whether the accounts are being
increased or decreased and whether the increase or decrease is a debit or credit. Ignore GST.

1. Owner gave their personal computer to the business..
2. Employed a secretary.
3. Cash payment made for insurance 6 months in advance.
4. Purchased supplies on credit.
5. Paid a creditor using an electronic transfer.
6. Invoiced a customer for services performed.
7. Owner paid for their personal groceries using the business credit card.
8. Paid some cash and took out a loan to purchase office furniture.
9. Received cash from a customer that owed the business money.
10. Paid for an advertisement aired on television.

1. Increase an asset (debit), increase equity (credit)
2. No transaction recorded.
3. Increase an asset (debit), decrease an asset (credit)
4. Increase an asset (debit), increase a liability (credit)
5. Decrease a liability (debit), decrease an asset (credit)
6. Increase an asset (debit), increase an income or revenue (credit)
7. Decrease equity (debit), increase a liability (credit)
8. Increase an asset (debit), decrease an asset (credit), increase a liability (credit)
9. Increase an asset (debit), decrease an asset (credit)
10. Increase an expense (debit), decrease an asset (credit).

3.5
Chapter 3: Recording transactions
Exercise 3.3 Effects of transactions on financial position

The following transactions were undertaken by Massenburg Personnel Services during the month
of February 2016. Ignore GST.
1. Invoiced a client for providing advice on current employment legislation, $2400.
2. Paid salaries to staff, $3600.
3. Paid an annual subscription for access to an online data base of employment legislation until
the end of January 2017.
4. Received $6000 from a client for employing staff for them in January.
5. M. Massenburg invested a further $20 000 additional capital into the business to ensure it has
sufficient cash to continue operations.
6. Purchased new office furniture and equipment on credit for $12 500.
7. Invoiced a client for $7000 for providing advice regarding an industrial dispute they had with
their employees.
8. Paid $720 electricity account the day the account was received.
9. Paid the firm’s lawyers for an account received from them in December for receiving legal
advice, $7100.
10. Paid for the equipment purchased in (6).
11. M. Massenburg withdrew $1200 from the business bank account for personal use.

Required
Indicate with the appropriate letter whether each of the transactions resulted in:
(a) an increase in assets and a decrease in assets
(b) an increase in assets and an increase in liabilities
(c) an increase in assets and an increase in equity
(d) a decrease in assets and a decrease in liabilities
(e) a decrease in assets and a decrease in equity
(f) an increase in liabilities and a decrease in equity
(g) an increase in equity and a decrease in liabilities.

1. (c) increase in assets and an increase in equity
2. (e) a decrease in assets and a decrease in equity
3. (a) an increase in assets and a decrease in assets
4. (a) increase in assets and a decrease in assets,
5. (c) increase in assets and an increase in equity
6. (b) an increase in assets and an increase in liabilities
7. (c) increase in assets and an increase in equity
8. (e) a decrease in assets and a decrease in equity
9. (d) a decrease in assets and a decrease in liabilities
10. (d) a decrease in assets and a decrease in liabilities
11 (e) a decrease in assets and a decrease in equity

3.6
Chapter 3: Recording transactions
Exercise 3.4 Normal balance and classification in financial statements

The accounts below appear in the chart of accounts of Brightspark Electrical Services. Show
whether the normal balance is a debit or a credit. Indicate whether the account would appear in
the balance sheet or in the income statement, and under what classification, e.g. liability, asset,
equity, income or expense.
1. Service Vehicles
2. Repairs Expense
3. Prepaid Insurance
4. Accounts Payable
5. Unearned Service Fees
6. Telephone Expense
7. Accounts Receivable
8. Electrical Supplies
9. B.A. Brightspark, Drawings
10. GST Payable
11. GST Receivable
12. Mortgage Payable
13. Interest Revenu
14. B. A. Brightspark, Capital
15. Electrical Services Revenue

BRIGHTSPARK ELECTRICAL SERVICES
Item Normal Statement
Balance
1. Service Vehicles Debit Balance sheet/Statement of financial
position (asset)
2. Repairs Expense Debit Income statement (expense)
3. Prepaid Insurance Debit Balance sheet/Statement of financial
position (asset)
4. Accounts Payable Credit Balance sheet/Statement of financial
position (liability)
5. Unearned Services Fees Credit Balance sheet/Statement of financial
position (liability)
6. Telephone Expense Debit Income statement (expense)
7. Accounts Receivable Debit Balance sheet/Statement of financial
position (asset)
8. Electrical Supplies Debit Balance sheet/Statement of financial
position (asset)
9. B.A, Brightspark, Debit Balance sheet/Statement of financial
Drawings position (deduction from equity)
10. GST Payable Credit Balance sheet/Statement of financial
position (liability)
11. GST Receivable Debit Balance sheet/Statement of financial
position (asset)
12. Mortgage Payable Credit Balance sheet/Statement of financial
position (liability)
3.7
Chapter 3: Recording transactions
13. Interest Revenue Credit Income Statement (income)
14. B.A. Brightspark, Capital Credit Balance sheet/Statement of financial
position (equity)
15. Electrical Services Credit Income Statement (income)
Revenue

3.8
Chapter 3: Recording transactions
Exercise 3.5 Recording transactions in general journal and
analysis

The chart of accounts of Pellham Poster Printers contained the following accounts: Cash at
Bank; Accounts Receivable; Equipment; Accounts Payable; K. Pellham, Drawings; Printing
Fees; Salaries Expense and Advertising Expense. Ignore GST.
The following transactions occurred during the month of June:

June 1 K. Pellham withdrew $850 cash for personal use.
5 Purchased new equipment for $5000. Paid $500 deposit with the balance to
be paid within 60 days.
9 Paid for advertising in the local newspaper, $510.
14 Paid $320 to creditors for office supplies that had been purchased on credit in
the previous month.
18 Paid salaries of $970.
22 Received $500 from customers to reduce their account balances.
30 $12 000 in printing fees were due during the month. Of this, 20% of the fees
were collected in cash and 80% will be paid within 60 days.

Required
A. Prepare the general journal entries to record the transactions (ignore GST).
B. For each transaction above, prepare an analysis similar to those shown in illustrative
examples in this chapter of the text.

A.
PELLHAM POSTER PRINTERS
(ignoring GST)
June 1 K. Pellham, Drawings $850
Cash at Bank $850
K. Pellham withdrew $850 for personal use.

5 Equipment 5 000
Cash at Bank 500
Accounts Payable 4 500
Purchased equipment for cash $500 and the balance
payable in 60 days.

9 Advertising Expense 510
Cash at Bank 510
Payment for newspaper advertisements.

14 Accounts Payable 320
Cash at Bank 320
Payment to suppliers.

18 Salaries Expense 970
Cash at Bank 970
Payment for newspaper advertisements.

22 Cash at Bank 500
3.9