Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
Question
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Chapter 9, Problem 3PA

(1)

To determine

To indicate: The effect of given transactions, on the accounting equation, and journalize the transactions

(1)

Expert Solution
Check Mark

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a company and claims of resources to creditors and owners.

Accounting equation is expressed as shown below:

Assets = Liabilities + Stockholders' Equity

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.

Effect of transaction occurred on January 2:

Assets = Liabilities + Stockholders’ Equity
Cash (–$20,000)   Notes Payable (+$230,000)    
Equipment (+$250,000)        

Table (1)

Prepare journal entry for the transaction occurred on January 2.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 2 Equipment   250,000  
      Cash     20,000
      Notes Payable     230,000
    (To record purchase of equipment)      

Table (2)

Description:

  • Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
  • Notes Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on January 3:

Assets = Liabilities + Stockholders’ Equity
Equipment (+$20,000)   Accounts Payable (+$20,000)    

Table (3)

Prepare journal entry for the transaction occurred on January 3.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 3 Equipment   20,000  
      Accounts Payable     20,000
    (To record purchase of equipment)      

Table (4)

Description:

  • Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
  • Accounts Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on January 30:

Assets = Liabilities + Stockholders’ Equity
Cash (–$20,000)   Accounts Payable (–$20,000)    

Table (5)

Prepare journal entry for the transaction occurred on January 30.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 30 Accounts Payable   20,000  
      Cash     20,000
    (To record payment of on account purchases)      

Table (6)

Description:

  • Accounts Payable is a liability account. Since the amount to be paid is paid, liability decreased, and a decrease in liability is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on February 1:

Assets = Liabilities + Stockholders’ Equity
Cash (–$800)       Repairs and Maintenance Expense (–$800)

Table (7)

Prepare journal entry for the transaction occurred on February 1.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
February 1 Repairs and Maintenance Expense   800  
      Cash     800
    (To record payment of expense)      

Table (8)

Description:

  • Repairs and Maintenance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on March 1:

Assets = Liabilities + Stockholders’ Equity
Cash (–$3,600)        
Licensing Rights (+$3,600)        

Table (9)

Prepare journal entry for the transaction occurred on March 1.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
March 1 Licensing Rights   3,600  
      Cash     3,600
    (To record purchase of licensing rights)      

Table (10)

Description:

  • Licensing Rights is an asset account. Since licensing rights are bought, asset account increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

(2)

To determine

The depreciation expense and amortization expense as on March 31

(2)

Expert Solution
Check Mark

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset.

Amortization expense: The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset over the estimated useful definite life, is referred to as amortization expense.

Formula for amortization expense:

Amortization expense=Cost of intangible asset×1Useful life

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life, is referred to as double-declining-balance method.

Formula for double-declining-balance depreciation method:

Depreciation expense}=(Book value at the beginning of the period )  ×    Depreciation rate(Cost–Accumulated depreciation)×2Useful life

Determine the depreciation expense for the equipmentfor 3 months (from January2 to March 31) under double-declining-balancemethod, if cost of machine is $270,000, useful life is 5 years, and accumulated depreciation is $0.

Depreciation expense}=Depreciable cost   ×    Depreciation rate(Cost–Accumulated depreciation)×2Useful life×Time period =($270,000$0)×25 years×312=$27,000

Determine amortization expense for 1 month (from March 1 to March 31), if cost of licensing right is $3,600, and useful life is 2 years.

Amortization expense ={Cost of intangible asset×1Useful life× Time period}= $3,600 × 12 years×112= $150

(3)

To determine

To journalize: The entries for depreciation expense and amortization expense

(3)

Expert Solution
Check Mark

Explanation of Solution

Prepare journal entry for the depreciation expense and amortization expense as on March 31 (Refer to Requirement (2) for the expense values).

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
March 31 Depreciation Expense   27,000  
    Amortization Expense   150  
      Accumulated Depreciation–Equipment     27,000
      Accumulated Amortization     150
    (To record depreciation expense)      

Table (11)

Description:

  • Depreciation Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Amortization Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Accumulated Depreciation–Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.
  • Accumulated Amortization is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

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Chapter 9 Solutions

Fundamentals Of Financial Accounting

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