Chapter 3, Problem 2PA

a.

To determine

Prepare an analysis of each of the transactions.

Explanation of Solution

1. (a) The asset account (Accounts receivable) is increased. Increase in asset account is recorded by a debit. Hence, debit Accounts receivable account with $2,500.

(b) Revenue has been earned and it is increased. Increase in revenue account in turn increases the owners’ equity account. Increase in owners’ equity account is recorded by credit. Hence, credit Testing service revenue account with $2,500.

2. (a) The asset account (Testing supplies) is increased. Increase in asset account is recorded by a debit. Hence, debit Testing supplies account with $3,800.

(b) The asset account (Cash) is decreased. Decrease in asset account is recorded by a credit. Hence, credit Cash account with $3,800.

3. (a) The liability account (Accounts payable) is decreased. Decrease in liability account is recorded by a debit. Hence, debit Accounts payable account with $100.

(b) The asset account (Testing supplies) is decreased. Decrease in asset account is recorded by a credit. Hence, credit Testing supplies account with $100.

4. (a) The asset account (Cash) is increased. Increase in asset account is recorded by a debit. Hence, debit Cash account with $20,000.

(b) The owners’ equity account (Capital stock) is increased. Increase in owners’ account is recorded by a credit. Hence, credit Capital stock account with $20,000.

5. (a) The asset account (Cash) is increased. Increase in asset account is recorded by a debit. Hence, debit Cash account with $600.

(b) The asset account (Accounts receivable) is decreased. Decrease in asset account is recorded by a credit. Hence, credit Accounts receivable account with $600.

6. (a) The liability account (Accounts payable) is decreased. Decrease in liability account is recorded by a debit. Hence, debit Accounts payable account with $2,900.

(b) The asset account (Cash) is decreased. Decrease in asset account is recorded by a credit. Hence, credit Cash account with $2,900.

7. (a) Dividend account is increased. Increase in dividend account in turn decreases the owners’ equity account (Retained earnings). Decrease in owners’ equity account is recorded by debit. Hence, debit Dividend account with $6,800.

(b) The asset account (Cash) is decreased. Decrease in asset account is recorded by a credit. Hence, credit Cash account with $6,800.

Working Note:

Calculate the outstanding accounts payable.

$\begin{array}{c}\left(\begin{array}{l}\text{Outstanding accounts}\\ \text{payable}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Purchase of testing supplies on account}-\text{Cash}\\ \text{paid}-\text{Testing supplies returned}\end{array}\right)\\ =\$3,800-\$800-\$100\\ =\$2,900\end{array}$

b.

To determine

Prepare journal entries to record the transactions.

Explanation of Solution

Journal entry:

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

Prepare journal entries to record the transactions as follows:

Date	Account title and Explanation	Post ref.	Debit  (in $)	Credit (in $)
August 1	Accounts receivable		2,500
	Service revenue			2,500
	(To record the services provided on account)
August 3	Testing supplies		3,800
	Cash			800
	Accounts Payable			3,000
	(To record the purchase of testing supplies)
August 5	Accounts payable		100
	Testing supplies			100
	(To record the return of testing supplies)
August 17	Cash		20,000
	Capital stock			20,000
	(To record the issue of the capital stock)
August 22	Cash		600
	Accounts receivable			600
	(To record the cash collected from accounts receivable)
August 29	Accounts payable		2,900
	Cash			2,900
	(To record the payment made to creditors on account)
August 29	Dividends		6,800
	Cash			6,800
	(To record the cash dividend paid)

Table (1)

Services provided on account:

• Accounts receivable is an asset account and it is increased. Hence, debit Accounts receivable account.
• Service revenue is a revenue account and it is increased which increases the owners’ equity account. Hence, credit the service revenue account.

Purchase of Testing Supplies:

• Testing supplies is the asset account and it is increased. Hence, debit Testing supplies account.
• Cash is an asset account and it is decreased. Hence, credit cash account.
• Accounts payable is a liability account and it is increased. Hence, credit Accounts payable account.

Return of Testing Supplies:

• Accounts payable is a liability account and it is decreased. Hence, debit Accounts payable account.
• Testing supplies is an asset account and it is decreased. Hence, credit Testing supplies account.

Issued Capital stock:

• Cash is an asset account and it is increased. Hence, debit cash account.
• Capital stock is the owners’ equity account and it is increased. Hence, credit capital stock account.

Collected Accounts receivable:

• Cash is an asset account and it is increased. Hence, debit cash account.
• Accounts receivable is an asset account and it is decreased. Hence, credit Accounts receivable account.

Paid Accounts payable:

• Accounts payable is a liability account and it is decreased. Hence, debit Accounts payable account.
• Cash is an asset account and it is decreased. Hence, credit cash account.

Paid Cash Dividend:

• Dividends account is increased. Hence, debit dividends account.
• Cash is an asset account and it is decreased. Hence, credit cash account.

c.

To determine

Explain the manner in which the realization principle influences the manner in which the August 1 billing to customers is recorded in the accounting records.

Explanation of Solution

Realization principle:

Realization principle states that, under the accrual basis of accounting, revenue must be recorded when a business has significantly completed the process of revenue generation. This means that revenue must be recognized only when the revenue generated is realized or realizable and earned.

According to the realization principle, the revenue should be recorded in the accounting records, once the service has been rendered and the revenue has been earned, irrespective of whether cash is received or not. On August 1, the company has rendered service to the customers and the revenue has been earned. Hence, the company has to record the revenue in the accounting records.

d.

To determine

Explain the manner in which the matching principle influences the manner in which the August 3 purchase of testing supplies is recorded in the accounting records.

Explanation of Solution

Matching Principle:

This accounting principle states that a company should recognize expenses in the same period those expenses are incurred to earn revenues.

According to the matching principle, the expense incurred in a particular accounting period should be matched with the revenues earned in the same period. On August 3, the company has purchased testing supplies. These supplies purchased are used in the same accounting period and they earn revenue which is matched with the expense incurred to purchase them in the same accounting period. Hence, the company has to record the purchase of testing supplies as the asset on August 3.