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Problems
3–1 Recording journal entries and 3, 4, 5 Conceptual, mechanical
identifying their effects on the
accounting equation
3–2 Recording journal entries and 3, 4, 5, 6, 7, Conceptual, mechanical
identifying their effects on the 8
accounting equation
3–3 Recording journal entries and 3, 4, 5, 6, 7, Conceptual, mechanical
identifying their effects on the 8
accounting equation
3–4 The accounting cycle 1 – 10 Conceptual, mechanical
3–5 The accounting cycle 1 – 10 Conceptual, mechanical
Cases
3–1 Revenue recognition 7, 10 Group assignment, conceptual,
communication
3–2 Income measurement 6, 7, 10 Ethics, group assignment,
communication, conceptual
Problems
3–1 Heartland Construction 30 Medium
A company engages in numerous transactions during its first month of
operations. Students are required to journalize each transaction and analyze the
effect of each transaction on the accounting equation.
Internet Assignment
3–1 Johnson & Johnson Corporation 10 Easy
Students are to identify the major geographic regions in which Johnson &
Johnson does business and to report the amount of revenue generated by each
geographic region.
Ex. 3–8
Income Statement Balance Sheet
Trans- Net Owners’
action Revenue − Expenses = Income Assets = Liabilities + Equity
1. I NE I I NE I
2. NE NE NE D D NE
3. NE NE NE NE NE NE
4. NE I D NE I D
5. NE NE NE I I NE
6. NE NE NE D NE D
Ex. 3–9
a.
Income Statement Balance Sheet
Trans- Net Owners’
action Revenue − Expenses = Income Assets = Liabilities + Equity
1. NE I D NE I D
2. I NE I I NE I
3. NE NE NE D NE D
4. NE NE NE I I NE
5. NE I D D NE D
6. NE NE NE NE NE NE
7. NE NE NE I I NE
8. NE NE NE D D NE
Ex. 3–10 a. An investment by stockholders does not constitute revenue. Although this investment causes
an increase in owners’ equity, this increase was not earned. It did not result from the
rendering of services or sale of merchandise to outsiders.
b. The collection of an account receivable does not increase owners’ equity and does not
represent revenue.
c. The borrowing of money from a bank creates a liability; it does not increase the owners’
equity and does not represent revenue.
d. The interest was earned in May and represents revenue of that month, despite the fact that no
withdrawals were made from the bank.
e. This fee was earned in May and represents revenue of that month, despite the fact that
collection will not be made until June.
Ex. 3–11 a. Purchase of a copying machine does not represent expense. The asset Cash is exchanged for
the asset Office Equipment, without any change in owners’ equity. The purpose of the
transaction was to obtain the use of the copier over a number of years, rather than to generate
revenue only during the current period. (Evergreen will recognize depreciation expense on
this asset throughout its useful life, but the purchase does not represent an expense in March.
Depreciation issues are introduced in Chapter 4.)
b. Gasoline purchased is an expense because it is ordinarily used up in the current period. These
purchases decrease the owners’ equity and are for the purpose of generating revenue.
c. Payment to an employee for services rendered in March is a March expense. Such a payment
is made to generate revenue and decreases owners’ equity.
d. The payment to the attorney for services rendered in a prior period reduced an existing
liability but did not affect the owners’ equity. The payment was not an expense.
e. The dividend does not constitute an expense. Unlike payments for advertising, rent, and
supplies, dividends do not generate revenue. Dividends constitute a return to stockholders of
a portion of their equity in the business.
Ex. 3–13 a. The company’s balance sheet is dated December 31. Thus, it is apparent that its financial year
coincides with the calendar year.
b. 1998: $487,423 = $90,966 + $396,457
c. The company’s cash (and cash equivalents) increased from $80,744 at the beginning of the
year, to $88,504 at the end of the year. Thus, it had to have posted more debits than credits to
cash (and cash equivalents). Note that these figures are stated in thousands of dollars.
20__
Feb. 1 Cash 500000
Capital Stock 500000
10 Land 100000
Office Building 200000
Cash 60000
Notes Payable 240000
23 Accounts Receivable 36
Computer Systems 36
28 Cash 36
Accounts Receivable 36
Stock)
PROBLEM 3–2
ENVIRONMENTAL SERVICES, INC. (continued)
20__ (1)
Aug. 1 Accounts Receivable 2500
Testing Service Revenue 2500
Billed customers for services rendered.
(2)
3 Testing Supplies 3800
Cash 800
Accounts Payable 3000
Purchased testing supplies.
(3)
5 Accounts Payable 100
Testing Supplies 100
Returned portion of testing supplies puchased on Aug. 3.
(4)
17 Cash 20000
Capital Stock 20000
Issued 2,500 shares of capital stock at $8 per share.
(5)
22 Cash 600
Accounts Receivable 600
Received partial payment for services billed on Aug. 1.
(6)
29 Accounts Payable 2900
Cash 2900
Paid outstanding balance owed for testing supplies
purchased on Aug. 3.
(7)
30 Dividends 6800
Cash 6800
Declared and paid a cash dividend.
PROBLEM 3–2
ENVIRONMENTAL SERVICES, INC. (concluded)
PROBLEM 3–3
WEIDA SURVEYING, INC. (concluded)
9 Cash 2830
Surveying Revenue 2830
Collected cash from Sunset Ridge Development for
services provided.
25 Cash 5620
Accounts Receivable 5620
Received payment from Fine Line Homes for services
billed on Sept. 3.
26 Cash 400
Accounts Receivable 1490
Surveying Revenue 1890
Collected partial payment from Thompson and billed
remainder.
30 Dividends 7600
Cash 7600
Declared and paid a cash dividend.
c. Three situations in which a cash payment does not involve an expense include: (1) the payment of a
cash dividend, (2) the payment of a liability for a previously recorded expense, and (3) the purchase of
an asset, including expenses paid in advance such as insurance, rent, and advertising.
PROBLEM 3–4
AERIAL VIEWS (continued)
2002
June 1 Cash 60000
Capital Stock 60000
Issued stock to Wendy Winger.
2 Aircraft 220000
Cash 40000
Notes Payable 180000
Purchased plane from Utility Aircraft.
25 Cash 4910
Accounts Receivable 4910
Collected portion of amount billed to customers.
30 Dividends
Dividends Payable 2000
Declared dividend payable July 15. 2000
PROBLEM 3–4
AERIAL VIEWS (continued)
Accounts Receivable
Date Explanation Debit Credit Balance
2002
June 15 8320 8320
25 4910 3410
30 16450 19860
Aircraft
Date Explanation Debit Credit Balance
2002
June 2 220000 220000
Notes Payable
Date Explanation Debit Credit Balance
2002
June 2 180000 180000
Accounts Payable
Date Explanation Debit Credit Balance
2002
June 30 2510 2510
PROBLEM 3–4
AERIAL VIEWS (continued)
Capital Stock
Date Explanation Debit Credit Balance
2002
June 1 60000 60000
Dividends
Date Explanation Debit Credit Balance
2002
June 30 2000 2000
Maintenance Expense
Date Explanation Debit Credit Balance
2002
June 18 1890 1890
PROBLEM 3–4
AERIAL VIEWS (continued)
Salaries Expense
Date Explanation Debit Credit Balance
2002
June 15 5880 5880
30 6000 11880
Rent Expense
Date Explanation Debit Credit Balance
2002
June 4 2500 2500
PROBLEM 3–4
AERIAL VIEWS (continued)
PROBLEM 3–4
AERIAL VIEWS (concluded)
Total assets:
Cash $ 8640
Accounts receivable 19860
Aircraft 220000
Total assets $248500
Total liabilities:
Notes payable $180000
Accounts payable 2510
Dividends payable 2000
Total liabilities $184510
The above figures are most likely not the amounts to be reported
in the balance sheet dated June 30. The accounting cycle includes
adjustments that must be made to the trial balance figures before
financial statements are prepared. The adjusting process is
covered in Chapter 4.
PROBLEM 3–5
DR. SCHEKTER, DVM (continued)
2002
May 1 Cash 400000
Capital Stock 400000
Issued 5,000 shares of capital stock.
4 Land 70000
Building 180000
Cash 100000
Notes Payable 150000
Purchased land and building.
24 Cash 1900
Accounts Receivable 300
Veterinary Service Revenue 2200
Recorded veterinary service revenue earned.
28 Cash 100
Accounts Receivable 100
Collected cash for May 24 services.
PROBLEM 3–5
DR. SCHEKTER, DVM (continued)
c.
Cash Notes Payable
May 1 400,000 May 4 100,000 May 4 150,000
Building
May 4 180,000
PROBLEM 3–5
DR. SCHEKTER, DVM (continued)
PROBLEM 3–5
DR. SCHEKTER, DMV (concluded)
Total assets:
Cash $1442 0 0
Accounts receivable 2 0 0
Office supplies 50 0 0
Medical instruments 1300 0 0
Office fixtures & equipment 500 0 0
Land 700 0 0
Building 1800 0 0
Total assets $579400
Total liabilities:
Notes payable $150000
Accounts payable 30400
Total liabilities $180400
As shown below, the business was not profitable in its first month
of operations:
Revenue is realized in the period that services are rendered to customers or goods are delivered to
customers. Using this principle as a guide, the three independent situations are analyzed below:
a. Period of flight. Airlines earn revenue by rendering a service—transportation—to their customers.
Therefore, revenue should be recognized in the accounting period in which this service is rendered.
(Selling a ticket does not qualify as “delivering goods” to the customer. The ticket is not a “product”—it
is merely a receipt showing that the customer has already made payment for services to be rendered in
the future.)
b. Period furniture sold. In this case the furniture store delivers goods to its customers and acquires an
account receivable at the date of sale. This is the period in which revenue should be recognized, even
though the account receivable may not be collected for many months. Collection of an account
receivable does not produce revenue; this action merely converts one asset (receivable) into another
(cash).
c. Periods that magazines are mailed to customers. The “goods” that a magazine publisher delivers to its
customers are magazines. Thus, the publisher does not earn its revenue until the magazines are delivered
to the customers. (For practical purposes, the act of mailing the magazine may be viewed as “delivery.”)
Answers to this assignment will vary among students. However, most will recognize that successful CIOs
often have educational backgrounds in business, management information systems, and/or computer science.
Much of the data captured by an information system is expressed in financial terms. Thus, accounting
courses—including financial accounting, managerial accounting, and accounting information systems—
certainly would benefit an aspiring CIO. Other business courses—such e-commerce and business strategy—
may also be helpful. MIS courses in systems design, systems implementation, data base management, and
networking would likely enhance the likelihood of being a successful CIO. Finally, computer science
courses in various programming languages, Internet technology, and hardware design would definitely be a
plus.
A recent annual report of the Johnson & Johnson Corporation reports worldwide revenue of $27.5 billion
dollars. The geographic breakdown of this amount is as follows:
Note to the Instructor: The above figures are subject to constant change. Students are encouraged to identify
any significant trends in the revenue generated by each geographic segment over several years.