Question

Prepare an answer sheet with the column headings shown here. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on the appropriate balance sheet category and on net income by entering for each account affected the account name and amount and indicating whether it is an addition (+) or a subtraction (–). Transaction a has been done as an illustration. Net income is not affected by every transaction. In some cases only one column may be affected because all of the specific accounts affected by the transaction are included in that category.

a) Accrued interest revenue of $25 on a note receivable.

b) Paid $2,400 in cash as an advance rent payment for a short-term lease that covers the next four months.

c) Recorded an adjustment at the end of the first month (in b) to show the amount of rent "used" in the month.

d) Inventory was acquired on account and recorded for $840. Perpetual inventory is maintained.

e) It was later determined that the amount of inventory acquired on account (in d) was erroneously recorded. The actual amount purchased was only $480. No payments have been made. Record the correction of this error.

f) Purchased 22 units of inventory at a cost of $38 each and then 8 more units of the same inventory item at $44 each. Perpetual inventory is maintained.

g) Sold 23 of the items purchased (in f) for $68 each and received the entire amount in cash. Record the sales transaction and the cost of goods sold using the LIFO cost flow assumption. Perpetual inventory is maintained.

h) Assume the same facts (in g) except that the company uses the FIFO cost flow assumption. Record only the cost of goods sold.

i) Assume the same facts (in g) except that the company uses the weighted-average cost flow assumption. Record only the cost of goods sold.

Answer 1

Transaction	Current Assets	Current Liabilities	Owners' Equity	Net Income
a)	Interest Receivables +25			Interest Income + 15
b)	Cash -2400	NE	NE	NE
	Prepaid Rent + 2400	NE	NE	NE
C)	Prepaid Rent (2400/4)= - 600	NE	NE	Rent Expenses -600
d)	Inventory +840	Accounts Payable +840	NE	NE
e)	Inventory (840-480) = -360	Accounts Payable -360	NE	NE
f)	Inventory (22 x $38)+(8 x $44) = +1188	NE	NE	NE
	Cash -1188	NE	NE	NE
g)	Cash (23 x $68) = +1564	NE	NE	Sales +1564
	Inventory (8 x 44)+(15 x $38) = -922	NE	NE	COGS -922
h)	Cash (23 x $68) = +1564	NE	NE	Sales +1564
	Inventory (1 x 44)+(22 x $38) = -880	NE	NE	COGS -880
i)	Cash (23 x $68) = +1564	NE	NE	Sales +1564
	Inventory (1188/30) = $39.6 x 23 =  -910	NE	NE	COGS -910