Solution manual fundamentals of accounting by cabrera chapter 07

Chapter 7
Analyzing and Summarizing Business Transactions
of a Service Entity
Exercises
Exercise 1
a. Received cash from a credit customer
b. 1. Owner invested cash into business
2. Cash was received as a result of revenue being earned
c. Purchased supplies on credit
d. 1. Owner withdrew cash from business
2. Paid cash for expense incurred
e. Earned revenue, cash to be received, at a later time
f. Made payment on an account payable
g. Purchased land for cash
Exercise 2
a. P200,000
b. P260,000
Exercise 3
b.
c.
d.
e.
f.
g.

NC, NC, NC
+, +, NC
NC, NC, NC
–, NC, –
+, NC, +
–, NC, –

Exercise 4
a.
b.
c.
d.
e.
f.

BS
OE
IS
IS
BS
BS

g.
h.
i.
j.
k.

IS
OE
BS
OE
BS


2

Chapter 7

Exercise 5
Cash
b.

Accounts
Receivable

Office
Equipmen
t
+ P10,000
P10,000

Accounts
Payable

P10,000
+ P20,000
P30,000

0
+ P20,000
P20,000

P30,000

P20,000

– P 5,000
P15,000
+ P 1,000
P16,000

Balance

– P10,000
P40,000

Balance

P40,000

Balance

P 5,000
– P 2,000
P 3,000

Balance

P40,000
+ P 2,000
P42,000
– P 5,000
P37,000

P 3,000

P30,000

Balance

P37,000

P 3,000

P30,000

c.

0
+ P 5,000
P 5,000

d.
e.
Balance
f.
g.

0

H. Phan,
Capital
P50,000
+ P 5,000
P55,000
P55,000

P55,000
P55,000
– P 1,000
P54,000

Exercise 6
Cash

Accounts
Receivable

b.
Balance
c.
Balance
d.
Balance
e.
Balance
f.
Balance
g.
Balance

P120,000
+P
P120,000
P
– P 7,000
P113,000

P
– P 8,000
P105,000
P
+ P 2,000 – P
P107,000
P
– P 1,500
P105,500
P

Supplies
+ P 7,000
0
P 7,000
4,000
4,000
P 7,000
4,000

P 7,000

4,000
2,000
2,000

P 7,000

2,000

P 7,000

P 7,000

Accounts
Payable
+ P 7,000
P 7,000

H. Lee,
Capital

P120,000
+ P 4,000
P 7,000
P124,000
– P 7,000
0
P124,000
– P 8,000
0
P116,000
0

P116,000
– P 1,500
0
P114,500

Exercise 7

January 10. No recording need be made. No business transaction yet.
February 15. Event should be recorded. Transaction has take place with the
exchange of values.


Analyzing and Summarizing Business Transactions of a Service Entity

3

March 1. Even should be recorded.
exchange of values.
Exercise 8

Transaction has take place with the

a.
b.
c.
d.
e.
f.

g.
h.
i.
j.
k.
l.

Liability

Asset
Asset
Asset
Liability
Asset

g.
h.
i.
j.
k.
l.

Credit
Debit
Debit
Debit
Credit
Debit

Liability
Asset
Expenses
Revenue
Expense
Asset

Exercise 9
a.
b.

c.
d.
e.
f.

Credit
Debit
Debit
Credit
Debit
Debit

Exercise 10
September 6
Accounts receivable
Service revenue

19,000
19,000

September 16
Cash

9,000
Accounts receivable

Exercise 11
a.
b.
c.

d.
e.
f.
g.
h.

(+)
(+)
(0)
(–)
(0)
(–)
(0)
(+)

9,000


4

Chapter 7

Exercise 12
1.
2.
3.
4.
5.

e

b
d
c
a

Exercise 13
a. P432,000: Assets P1,116,000  liabilities P684,000 = owners’ equity
P432,000
b. P1,875,000: Liabilities P1,125,000 + owners’ equity P750,000 = assets
P937,500
c. P330,000: Assets P615,000  owners’ equity P285,000 = liabilities P330,000
Exercise 14
Transaction

Assets

a
b
c
d
e
f
g
h
i

I
NE*
D
D

I
I
I
NE*
NE*

*Could be I/D offsetting

=

Liabilities
I
NE
D
D
NE
I
NE
NE
NE

+

Owners’ Equity
NE
NE
NE
NE
I
NE

I
NE
NE


Analyzing and Summarizing Business Transactions of a Service Entity

5

Exercise 15
JANNY COMPANY
Statement of Cash Flows
For the Month Ended January 31, 2007
Cash flows from operating activities:
Cash received from revenues...................................................................
P100,000
Cash paid for expenses.............................................................................
(62,000)
Net cash provided by operating activities.....................................................................
P38,000
Cash flows from investing activities:
Cash paid for equipment...............................................................................................
(25,000)
Cash flows from financing activities:
Cash received from sale of share capital.................................................
P50,000
Cash used to repay bank loans................................................................
(20,000)
Net cash provided by financing activities..................................................
30,000

Increase in cash.............................................................................................
P43,000
Cash balance, January 1, 2007....................................................................56,000
Cash balance, January 31, 2007..................................................................
P99,000
Exercise 16
BEIGE, INC.
Income Statement
For the Month Ended March 31, 2007
Revenues...........................................................................................................................
P85,000
Expenses...........................................................................................................................
 50,000
Net income.........................................................................................................................
P35,000
The cash received from bank loans is a positive cash flow—financing activity—in
the statement of cash flows, but is not included in the income statement. Similarly,
dividends paid to stockholders are a negative cash flow—financing activity—in the
statement of cash flows, but are not included in the income statement.


6

Chapter 7

Exercise 17
ANDALASA COMPANY
Income Statement
For the Month Ended August 31, 2007
Service revenues...............................................................................................................

P100,000
Expenses...........................................................................................................................
  75,000
Net income.........................................................................................................................
P 25,000
The following four items represent cash flows, but are not revenues or expenses
that should be included in the income statement:
 Investment by stockholders
 Loan from bank
 Payments to long-term creditors
 Purchase of land
Exercise 18
a. Pay a liability
b. Investment by owner
Revenue transaction
c. Purchase of asset on account
Borrow money
d. Purchase of asset for cash
Sale of asst for cash
Collection of account receivable
e. Withdrawal by owner
Expense transaction
Exercise 19
a.
b.
c.
d.
e.
f.
g.

h.
i.
j.

Increased assets (cash)
No effect on total assets. Increase in land offset the decrease in cash.
Increased assets (cash)
Decreased assets (cash)
Increased assets (machinery and equipment)
Increased assets (accounts receivable)
Decreased assets (cash)
No effect on total assets. Increase in cash offset the decrease in accounts
receivable.
No effect (a personal transaction)
No effect on total assets. Increase in cash offset the decrease in land.


Analyzing and Summarizing Business Transactions of a Service Entity

Exercise 20
a. Increase in asset (Cash)
Increase owner’s equity (Capital)
b. Increase asset (Office Supplies)
Decrease asset (Cash)
c. Increase asset (Cash)
Increase owner’s equity (Service Revenue)
d. Decrease in asset (Cash)
Decrease in owner’s equity (Rent Expense)
e. Increase asset (Accounts Receivable)
Increase owner’s equity (Service Revenue)

f. Increase asset (Office Furniture)
Increase liability (Accounts Payable)
g. Increase asset (Cash)
Decrease asset (Accounts Receivable)
h. Decrease asset (Cash)
Decrease liability (Accounts Payable)
i. Increase asset (Cash)
Decrease asset (Land)
Exercise 21
Red Co.

White Co.

Blue Co.

Beginning:
Assets.....................................................
P 500,000
Liabilities.................................................
(200,000)

P 900,000
(600,000)

P1,100,000
(500,000)

Owner’s Equity.......................................
P 300,000

P 300,000

P 600,000

Ending:
Assets.....................................................
P 700,000
Liabilities.................................................
(350,000)

P 150,0002
800,000

P1,600,000
700,000

Owner’s Equity.......................................
P 350,000

P 700,000

P 900,000

Owner’s Equity:
Investments by Owner...........................
P
0
Withdrawals by Owner...........................400,000

P 100,000

700,000

P 200,000
1,000,000

Net increase (decrease).........................
P (400,000)

P (600,000)

Income Statement:
Revenues................................................
P2,100,000
Expenses................................................
1,650,0001
Net income.............................................
P 450,000

P4,000,000
3,000,000
P1,000,000

P4,300,000
3,200,000
P1,100,000

7


8

Chapter 7

Statement of Owner’s Equity:
Beginning owner’s equity.......................
P 300,000
+ Investments by owner.........................
0
+ Net income..........................................
x1
– Withdrawals by owner.........................
(400,000)
= Ending owner’s equity.........................
P 350,000
___________
1
Net income (x) = P450,000
Revenues – expenses
= net income
P2,100,000 – expenses
= P450,000
Expenses = P1,650,000
2

Assets – liabilities = OE

Assets – P800,000 = P700,000
Assets = P150,000
3

P600,000 + Investments (y) +
P1,100,000 – P1,000,000 = P900,000
Investments = P200,000

Exercise 22
Requirement (1)
Classification of Events
Feb.

4
5
6
7
10

C
A
A
A
C

Requirement (2)

11
12
18
25
28

C

B
A
A
A

P 300,000
100,000
1,000,000
(700,000)
P 700,000

P 600,000
y3
1,100,000
(1,000,000)
P 900,000


Analyzing and Summarizing Business Transactions of a Service Entity

ASSETS

Date
Feb.
4*
5

Accounts
Receivable

Cash

Supplies

Bal.
Bal.

597,000
10*
11*
12*
18

28
Bal.

Owner
investment

3,000

600,000
70,000
70,000

70,000
70.000

600,000

40,000
597,000
(10,000)
587,000
(20,000)
567,000

Type of
Owner’s
Equity
Transaction

600,000
3,000
3,000

7

Bal.

Accounts
Payable

Lorenzo
Cabrera,
Capital
600,000

600,000
(3,000)

597,000

6

25

OWNER’S
EQUITY

600,000

Bal.

Bal.

Office
Furniture

LIABILITIES

9

40,000

40,000

3,000

70,000

70,000

40,000

3,000

70,000

70,000

40,000

3,000

70,000

70,000

640,000
(10,000)
630,000
(20,000)
610,000

Service
revenue
Rent expense
Withdrawal

______

* Not a transaction of the business.

Exercise 23
Requirement (1)
Mitch Chua, Realtor
Balance Sheet
November 30, 2007
ASSETS

LIABILITIES

Cash
Office supplies
Franchise
Furniture
Land

P

120,000
10,000
200,000
170,000
1,400,000

Total assets

P1,900,000

Accounts payable

P 60,000
Note payable
850,000
Total liabilities
P 910,000
OWNER’S EQUITY
Mitch Chua, capital
990,000
Total liabilities and
owner’s equity
P1,900,000

Requirement (2)
Personal items not reported on the balance sheet of the business:
c.

Personal residence (P1,700,000) and mortgage payable (P1,200,000)

d. Personal cash (P100,000)
e. Personal accounts payable (P18,000)
Exercise 24


10

Chapter 7

Requirement (1)
Lua Lim, Realtor
Balance Sheet

March 31, 2007
ASSETS

LIABILITIES

Cash
Office supplies
Franchise
Furniture
Land

P

90,000
10,000
150,000
120,000
700,000

Total assets

P1,070,000

Accounts payable
P 60,000
Note payable
330,000
Total liabilities
P 390,000
OWNER’S EQUITY

Mitch Chua, capital
680,000
Total liabilities and
owner’s equity
P1,070,000

Requirement (2)
Personal items not reported on the balance sheet of the business:
a. Personal cash (P50,000)
b. Personal residence (P900,000) and mortgage payable (P650,000)
f.

Personal account payable (P9,500)

Exercise 25
+
+ =+
+ + Cash
Dec. 31
Balance
s
P 95,000
(1)
– 27,000
P 68,000
(2)
+ 40,000
P108,000
(3)
– 32,000

P 76,000
(4)
+100,000
P176,000
(5)
–150,000
P 26,000
(6)
+200,000

=
Assets
Accounts
Office
Receivabl
Equipmen
e
Trucks
t
P 89,000

P580,000

P 89,000
+ 40,000
P 49,000
P 49,000

Liabilities
Account

Notes
s
Payable
Payable

Owners’
Equity
Share
Capital

P200,000 P 52,000

P550,000

P580,000

P 38,000
+ 27,000
P 65,000

P200,000 P 52,000

P550,000

P580,000

P 65,000
P 65,000

52,000

32,000
20,000

P550,000

P580,000

P580,000
+ 305,000
P 49,000 P885,000

P 65,000

P200,000 P
–
P200,000 P
+100,000
P300,000 P
+155,000
P455,000 P

20,000

P550,000

20,000

P550,000
+200,000

P 49,000

P 65,000

P550,000


Analyzing and Summarizing Business Transactions of a Service Entity

Balance
s

P226,000

P 49,000

P885,000

P 65,000

P455,000 P 20,000

11

P750,000

Multiple Choice Questions
1.
2.
3.

4.
5.

a
c
a
d
b

6.
7.
8.
9.
10.

d
c
b
c
d

11.
12.
13.
14.
15.

b
a
c

a
c

16.
17.
18.
19.
20.

d
c
b
d
d

21.
22.
23.
24.
25.

c
b
c
a
d

Test Material
Test Material 7-1
Description of transactions:

a. Purchased equipment for cash at a cost of P3,200.
b. Received P900 cash from collection of accounts receivable.
c. Purchased equipment at a cost of P13,500; paid P3,500 cash as down
payment and incurred a liability (account payable) for the remaining P10,000.
d. Paid P14,500 of accounts payable.
e. P15,000 cash was received from the sale of capital stock.
f. Purchased equipment on account for P2,100.


12

Chapter 7


Analyzing and Summarizing Business Transactions of a Service Entity

13

Test Material 7-2

Assets
+

Cash
+

+
Land

P 950,000

=
Building

Dec. 31 Balances

P 370,000

P1,250,000

(1)

+ 250,000

Balances

P 620,000

P 950,000

P1,250,000

(2)

– 225,000

+ 350,000

+ 550,000

Balances

P 395,000

P1,300,000

P1,800,000

(4)

+ 100,000

Balances

P 495,000

(5)

+ 282,500

Balances

P 212,500

P512,500

+=

P 800,000

P282,500

Owner’s
Equity
Share
Capital
P2,000,000
+ 250,000

(3)
Balances

Office
Equipment

Liabilities
+
Notes
Accounts
Payable
Payable
+

P512,500

P 800,000

P282,500

P2,250,000

P2,250,000

+ 675,000
P512,500

P1,475,000

P282,500

+ 85,000

+ 100,000

+ 85,000

P1,300,000

P1,800,000

P597,500

P1,575,000

P367,500

P2,250,000

P1,300,000

P1,800,000

P597,500

P1,575,000

P367,500

P2,250,000

–282,500
P1,300,000

P1,800,000

P597,500

P1,575,000

P 85,000

P2,250,000


14

Chapter 7

Test Material 7-3
Requirement (1)

Analysis of Transactions
ASSETS

Date
Bal.
a)
Bal.
b)
Bal.
c)
Bal.
d)
Bal.
e)
Bal.
f)
Bal.
g)
Bal.
h)

Cash
12,500
200,000
212,500
7,000
219,500
(80,000)
139,500
139,500

10,000
149,500
10,000
159,500
159,500
(10,000)

Accounts
Receivable
15,000

LIABILITIES

Land
120,000

Accounts
Payable
80,000

15,000

120,000

80,000

15,000

120,000

80,000
(80,000)

Supplies

15,000
15,000
(10,000)
5,000
5,000
24,000
29,000

Bal.
i)
Bal.
j)

149,500
1,500
151,000
(18,000)

29,000

Balance

133,000

120,000

OWNER’S
EQUITY
Type of
Katrina
Owner’s
Morales,
Equity
Capital
Transaction
67,500
200,000 Owner investment
267,500
7,000 Service revenue
274,500
274,500

10,000
10,000

120,000

10,000
10,000

10,000

120,000

10,000

10,000

120,000

10,000

10,000

120,000

10,000

274,500
274,500
10,000
284,500
24,000
30,850
(9,000)
(1,000)
298,500

Owner investment
Service revenue
Rent expense
Advertising exp.

120,000

10,000

29,000

10,000
(1,500)
8,500

120,000

10,000

298,500
(18,000) Owner withdrawal

29,000

8,500

120,000

10,000

280,500

Requirement (2)
Morales Interiors
Income Statement
For the Month Ended September 30, 2007
Revenues:

Service revenue (P7,000 + P24,000)
Expenses:
Rent expense
Advertising expense
Total expenses
Net income

Requirement (3)

P31,000
P9,000
1,000
10,000
P21,000


Analyzing and Summarizing Business Transactions of a Service Entity

15

Morales Interiors
Statement of Owner’s Equity
For the Month Ended September 30, 2007
Katrina Morales, capital, August 31, 2007
Add: Investments by owner (P200,000 + P10,000)
Net income for the month

P 67,500
210,000
21,000

P298,500
18,000
P280,500

Less: Withdrawals by owner
Katrina Morales, capital, September 30, 2007

Requirement (4)
Morales Interiors
Balance Sheet
September 30, 2007
ASSETS
Cash
Accounts receivable
Supplies
Land
Total assets

LIABILITIES
P

133,000
29,000
8,500
120,000
P290,500

Accounts payable
OWNER’S EQUITY
Katrina Morales, capital

Total liabilities and
owner’s equity

P

10,000
280,500
P290,500

Requirements (5) and (6)
Learning this material will help you manage a business by:
1. Showing you how to account for the two sides of every transaction.
2. Showing you how to prepare the financial statements in order to measure
how well the business performed (net income or net loss) and where it
stands financially (assets, liabilities, and owner’s equity).
Note: Students may answer in various other ways. There is no single correct
answer.