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a.
Record the events in general journal format and post to T-accounts.
a.
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Explanation of Solution
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.
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
Straight-line
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Record the events in general journal format.
Event | Account title and Explanation | Post ref |
Debit (in $) | Credit (in $) |
1. | Cash | 20,000 | ||
Common Stock | 20,000 | |||
(To record the issue of the common stock) | ||||
2. | Equipment–Ice Cream machine | 20,000 | ||
Cash | 20,000 | |||
(To record the purchase of equipment) | ||||
3. | Cash | 36,000 | ||
Sales Revenue | 36,000 | |||
(To record the sales revenue) | ||||
4. | Salaries Expense | 21,000 | ||
Cash | 21,000 | |||
(To record salaries expense) | ||||
5. | Operating Expenses | 6,000 | ||
Cash | 6,000 | |||
(To record operating expenses) | ||||
6. | Depreciation Expense | 3,000 | ||
3,000 | ||||
(To record depreciation expense ) |
Table (1)
Working note:
Calculate the depreciation expense on Ice cream machine.
Post the events to T-accounts as follows:
Cash | |||
1. | 20,000 | 2. | 20,000 |
3. | 36,000 | 4. | 21,000 |
5. | 6,000 | ||
Balance 9,000 |
Equipment–Ice cream machine | |||
2. | 20,000 | ||
Balance 20,000 |
Accumulated Depreciation | |||
6. | 3,000 | ||
Balance 3,000 |
Common Stock | |||
1. | 20,000 | ||
Balance 20,000 |
Service Revenue | |||
3. | 36,000 | ||
Balance 36,000 |
Operating Expense | |||
5. | 6,000 | ||
Balance 6,000 | |||
Salaries Expense | |||
4. | 21,000 | ||
Balance 21,000 |
Depreciation Expense | |||
6. | 3,000 | ||
Balance 3,000 |
b.
Determine the amount of depreciation expense that Shop S would report on the Year 2 income statement.
b.
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Explanation of Solution
Straight-line Depreciation:
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Calculate the depreciation expense on Ice cream machine.
Hence, the amount of depreciation expense that Shop S would report on the Year 2 income statement is $3,000.
c.
Determine the amount of accumulated depreciation that Shop S would report on the December 31, Year 2,
c.
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Explanation of Solution
Accumulated depreciation:
The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation.
Formula for accumulated depreciation:
Calculate the accumulated depreciation on December 31, Year 2.
Hence, the amount of accumulated depreciation that Shop S would report on the December 31, Year 2, balance sheet is 6,000.
d.
Identify whether the
d.
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Answer to Problem 7BE
No, the cash flow from operating activities would not be affected by depreciation in Year 2.
Explanation of Solution
Cash flows from operating activities:
These refer to the cash received or cash paid in day-to-day operating activities of a company. In the direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year. In the indirect method, some amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Depreciation is a non-cash expense. It is added to net income while preparing the statement of cash flows under the indirect method. During the preparation of net income, the depreciation is not considered as an expense but as a non-cash expense. That is, each year when depreciation expense is recorded in the financial statements, no cash payment is made actually. Therefore, it is again added back to the net income in the preparation of cash flows under the indirect method.
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Chapter 8 Solutions
Fundamental Financial Accounting Concepts
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