Chapter 2, Problem 5PB

1.

To determine

Prepare the journal entry to record the transaction for Maintenance Services O.

Explanation of Solution

Prepare the journal entry to record the transaction for Maintenance Services O.

Date	Account Title and Explanation		Debit($)	Credit($)
May 2	Prepaid insurance		300
		Cash		300
	(To record the prepaid insurance)
May 5	Accounts Receivable		425
		Service revenue		425
	(To record the maintenance services rendered on account)
May 7	Notes receivable		500
		Cash		500
	(To record the loan provided by signing a note)
May 14	Supplies		200
		Cash		200
	(To record the purchase of maintenance supplies)
May 19	Cash		425
		Accounts Receivable		425
	(To record cash received on account)
May 25	No entry
May 28	Insurance expense		300
		Prepaid insurance		300
	(To record the revenue for the services rendered)
May 31	Cash		500
		Notes receivable		500
	(To record the cash received on note)

Table (1)

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Paid advance insurance on May 2:

• Prepaid Insurance is an asset and increased by $300. Therefore, debit Prepaid Insurance account with $300.
• Cash is an asset and decreased by $300. Therefore, credit Cash account with $300.

Rendered service on account on May 5:

• Accounts Receivable is an asset and increased by $425. Therefore, debit accounts receivable account with $425.
• Service Revenue is revenue and increased by $425. Therefore, credit service revenue account with $425.

Loaned cash to E Insurance Service by receiving notes receivable on May 7:

• Notes Receivable is an asset and increased by $500. Therefore, debit Notes Receivable account with $500.
• Cash is an asset and decreased by $500. Therefore, credit cash account with $500.

O Maintenance Service purchased supplies from S Corporation on May 14:

• Supplies are an asset and increased by $200. Therefore, debit office supplies account with $200.
• Cash is an asset and decreased by $200. Therefore, credit cash account with $200.

Cash received from clients for service rendered May 19:

• Cash is an asset and increased by $425. Therefore, debit cash account with $425.
• Accounts Receivable is an asset and decreased by $425. Therefore, credit accounts receivable account with $425.

E Insurance Services paid monthly Utilities on May 25:

No entry.

Received service paid in advance on May 28:

• Insurance Expense is an expense. There is an increase in the expenses, and therefore it is debited.
• Prepaid Insurance is an asset. There is a decrease in assets, and therefore it is credited.

Cash received from E Insurance Services for the note on May 31:

• Cash is an asset and increased by $500. Therefore, debit cash account with $500.
• Notes Receivable is an asset and decreased by $500. Therefore, credit Notes Receivable account with $500.

2.

To determine

Indicate the impact of each transaction on the accounting equation for each company.

Explanation of Solution

Indicate the impact of each transaction on the accounting equation for J Lawn Maintenance Company.

Lawn Maintenance Company J
Accounting Equation
Date	Assets ($)	=	Liabilities ($)	+	Stockholders' Equity ($)
May 2	300		300		0
May 5	0		425		425
May 7	500		500		0
May 14	0		0		0
May 19	(425)		(425)		0
May 25	(135)				(135)
May 28	0		(300)		(300)
May 31	(500)		(500)		0

Table (2)

Indicate the impact of each transaction on the accounting equation for Repair shop L.

Repair Shop L
Accounting Equation
Date	Assets ($)	=	Liabilities ($)	+	Stockholders' Equity ($)
May 3	0		500		(500)
May 6	450		0		450
May 9	(500)		(500)		0
May 14	600		600		0
May 18	0		0		0
May 20	450		0		0
	(450)
May 27	800		0		800
May 30	(300)		0		(300)
May 31	(600)		600		0

Table (3)

Accounting Equation:

Accounting equation is the mathematical representation of the relationship among the assets, liabilities, and stockholder’s equity at any given point of time. The components of the accounting equation include the assets, liabilities and stockholder’s Equity. In the accounting equation, the assets, which are placed on the left side of the equation, and the liabilities, and stockholder’s equity which are placed on the right side, must always balance. The accounting equation is as follows:

$\boxed{\text{Assets = Liabilities + Stockholder's Equity}}$