Chapter 4, Problem 5PA

1.

To determine

Record the given 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.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Record the given transactions.

Date	Account Title	Debit	Credit
October 02	Cash	$8,500
	Service Revenue		$8,500
	(To record the membership dues collected)
October 05	Cash	$12,000
	Common Stock		$12,000
	(To record the common stock issued)
October 09	Equipment	$9,600
	Cash		$4,800
	Account Payable		$4,800
	(To record the purchase of equipment)
October 12	Advertising Expense	$1,500
	Cash		$1,500
	(To record the advertising expenses paid)
October 19	Dividends	$4,400
	Cash		$4,400
	(To record the dividends issued)
October 22	Prepaid Insurance	$6,900
	Cash		$6,900
	(To record the prepaid expenses)
October 25	Cash	$5,600
	Deferred Revenue		$5,600
	(To record the membership dues collected in advance)
October 30	Utilities Expense	$5,200
	Utilities Payable		$5,200
	(To record the utilities expenses)
October 31	Salaries Expense	$7,300
	Cash		$7,300
	(To record the salaries paid)

Table (1)

2.

To determine

Identify the transactions involving cash.

Answer to Problem 5PA

All the transactions are cash transactions except the Utilities which are purchased on account on October 30^th.

Explanation of Solution

The transactions in which the cash is involved either as receipt or payment are alone recorded as cash transactions. The transactions in which no cash is involved include the purchase of utilities on account.

3.

To determine

Post the given cash transactions to Cash T-Account and compute the closing cash balance.

Answer to Problem 5PA

Cash Account
Date	Particulars	Amount	Date	Particulars	Amount
October 01	Opening cash balance	$16,600	October 09	Equipment purchased	$4,800
October 02	Service Revenue	$8,500	October 12	Advertising Expense	$1,500
October 05	Common Stock	$12,000	October 19	Dividends	$4,400
October 25	Deferred Revenue	$5,600	October 22	Prepaid Insurance	$6,900
			October 31	Salaries Expenses	$7,300
		$17,800			$24,900

Explanation of Solution

T-account: T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’. The components of the T-account are as follows:

a)      The title of the account

b)      The left or debit side

c)      The right or credit side

4.

To determine

Prepare statement of cash flows for the month of October for B Gym.

Answer to Problem 5PA

B Gym
Statement of Cash Flows
For the month ended October 31
Particulars	Amount ($)	Amount ($)
Cash flows from Operating Activities
Cash inflows:
From Customers	$14,100
Cash outflows:
Advertising expense	($1,500)
Prepaid insurance	($6,900)
Salaries expense	($7,300)
Net cash flow from Operating Activities		($1,600)
Cash flows from Investing Activities
Purchase of boxing equipment	($4,800)
Net cash flow from Investing Activities		($4,800)
Cash flows from Financing Activities
Issuance of Common Stock	$12,000
Payment of dividends	($4,400)
Net cash flow from Financing Activities		$7,600
Net increase in cash		$1,200
Cash at the beginning of the month		$16,600
Cash at the end of the month		$17,800

Table (2)

Explanation of Solution

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

5.

To determine

Verify the net cash flows reported in the statement of cash flows equal the change in the cash balance for the month.

Answer to Problem 5PA

The net cash flows reported in the statement of cash flows for the month is $1,200.

Explanation of Solution

Calculate the net cash flows reported in the statement of cash flows equal the change in the cash balance for the month of October.

$\begin{array}{c}\text{Net cash flow for the month = Closing Cash Balance }-\text{ Opening Cash Balance }\\ =\$17,800-\$16,600\\ =\$1,200\end{array}$