2.7: Exercises

EXERCISE 2–1 (LO1) Accounts

Below is a list of various accounts:

a.	b.
		Unearned consulting fees			Vehicles
		Prepaid insurance			Depreciation expense
		Office supplies			Interest income
		Notes receivable			Interest expense
		Insurance fee revenue			Furniture
		Unearned insurance fee revenue			Utilities payable
		Salary and benefits expense			Unearned rent revenue
		Small tools and supplies			Retained earnings
		Service fees earned			Salaries and benefits payable
		Service fees revenue			Compensation expense
		Notes payable			Interest earned
		Buildings			Meals and mileage expense
		Rent payable			Unearned service fees
		Share capital			Equipment

Required:

1. Identify each account as either an asset (A), liability (L), equity (E), revenue (R), or expense (E).
2. Identify whether the normal balance of each account is a debit (DR) or credit (CR).

EXERCISE 2–2 (LO1) Accounts

Required: Using the list from EXERCISE 2–1, identify if a debit or credit is needed to decrease the normal balance of each account.

EXERCISE 2–3 (LO2)

Required: Record the debit and credit for each of the following transactions (transaction 1 is done for you):

	Assets		Liabilities		Equity
	Debit	Credit	Debit	Credit	Debit	Credit
	(increase)	(decrease)	(decrease)	(increase)	(decrease)	(increase)
1. Purchased a $10,000 truck on credit.	10,000			10,000
2. Borrowed $5,000 cash from the bank.
3. Paid $2,000 of the bank loan in cash.
4. Paid $600 in advance for a one-year insurance policy.
5. Received $500 in advance from a renter for next month's rental of office space.

EXERCISE 2–4 (LO2)

Required: Record the debit and credit in the appropriate account for each of the following transactions (transaction 1 is done for you):

	Debit	Credit
1. Issued share capital for cash.	Cash	Share Capital
2. Purchased equipment on credit.
3. Paid for a one-year insurance policy.
4. Billed a customer for repairs completed today.
5. Paid this month's rent.
6. Collected the amount billed in transaction 4 above.
7. Collected cash for repairs completed today.
8. Paid for the equipment purchased in transaction 2 above.
9. Signed a union contract.
10. Collected cash for repairs to be made for customers next month.
11. Transferred this month's portion of prepaid insurance that was
used to Insurance Expense.

EXERCISE 2–5 (LO2) Using T-accounts

Below are various transactions for the month of August, 2016, for BOLA Co. This is their first month of operations.

1. Issued share capital in exchange for $3,000 cash.
2. Received an invoice from the utilities company for electricity in the amount of $200.
3. Bank approved a loan and deposited $10,000 into the company's bank account.
4. Paid employee salaries in the amount of $2,000.
5. Received repair services worth $5,000 from a supplier in exchange for a note due in thirty days.
6. Completed service work for a European customer. Invoiced $8,000 EURO (European funds). The Canadian currency equivalent is $12,000 CAD. (hint: Recall the monetary unit principle.)
7. Completed $7,000 of service work for a customer on account.
8. Purchased $1,000 of equipment, paying cash.
9. Received $8,000 EURO ($12,000 CAD) cash for service work done regarding item (6).
10. Rent of $5,000 cash was paid for the current month's rent.
11. Made a payment of $1,500 cash as a loan payment regarding item (3). The payment covered $150 for interest expense and the balance of the cash payment was to reduce the loan balance owing.
12. Reimbursed $25 in cash to an employee for use of his personal vehicle for company business for a business trip earlier that day.
13. Received a cash of $5,000 regarding the service work for item (7).
14. Vehicle worth $30,000 purchased in exchange for $10,000 cash and $20,000 note due in six months.
15. Paid the full amount of the utilities invoice regarding item (2).
16. Purchased $3,000 of furniture on account.
17. Completed $2,000 of service work for a customer and collected cash.
18. Received a cheque in the amount of $2,000 from a customer for service work to be done in two months.
19. Purchased office supplies for $3,000 on account.
20. Completed a project for a customer and billed them $8,000 for the service work.
21. Purchased a laptop computer for $2,500 in exchange for a note payable.
22. September rent of $5,000 was paid two weeks in advance, on August 15.

Required: Create a separate T-account for each asset, liability, equity, revenue and expense account affected by the transactions above. Record the various transactions debits and credits into the applicable T-account (similar to the two T-accounts shown in Section 2.1, under the heading T-accounts, for Cash and Accounts payable). Calculate and record the ending balance for each T-account. (Hint: Include the reference to the transaction number for each item in the T-accounts, to make it easier to review later, if the accounts contain any errors.)

EXERCISE 2–6 (LO3) Preparing a Trial Balance

Required: Using the T-accounts prepared in EXERCISE 2–5, prepare an August 31, 2024, trial balance for the company based on the balances in the T-accounts.

EXERCISE 2–7 (LO3) Preparing Financial Statements

Required: Using the trial balance in EXERCISE 2–6, prepare the August 31, 2024, income statement, statement of changes in equity and the balance sheet for the company based on the balances in the T-accounts.

EXERCISE 2–8 (LO2)

Required: Post the following transactions to the appropriate accounts:

1. Issued share capital for $5,000 cash (posted as an example).
2. Paid $900 in advance for three months' rent, $300 for each month.
3. Billed $1,500 to customers for repairs completed today.
4. Purchased on credit $2,000 of supplies to be used next month.
5. Borrowed $7,500 from the bank.
6. Collected $500 for the amount billed in transaction (3).
7. Received a $200 bill for electricity used to date (the bill will be paid next month).
8. Repaid $2,500 of the bank loan.
9. Used $800 of the supplies purchased in transaction (4).
10. Paid $2,000 for the supplies purchased in transaction (4).
11. Recorded the use of one month of the rent paid for in transaction (2).

Cash		Bank Loan		Share Capital		Repair Revenue
(1) 5,000					(1) 5,000
Accounts Receivable		Accounts Payable				Electricity Expense
Prepaid Expense						Rent Expense
Unused Supplies						Supplies Expense

EXERCISE 2–9 (LO3)

The following Trial Balance was prepared from the books of Cross Corporation at its year-end, December 31, 2023. After the company's bookkeeper left, the office staff was unable to balance the accounts or place them in their proper order. Individual account balances are correct, but debits may be incorrectly recorded as credits and vice-versa.

Account Title	Account Balances
	Debits	Credits
Cash	$120,400
Commissions Earned	5,000
Share Capital		$170,000
Accounts Payable	30,000
Insurance Expense	100
Land		8,000
Building		120,000
Rent Expense		1,000
Accounts Receivable		26,000
Unused Supplies	6,000
Supplies Expense		300
Loan Payable		80,000
Salaries Expense		3,000
Telephone Expense	200
Totals	$161,700	$408,300

Required: Prepare a corrected Trial Balance showing the accounts in proper order and balances in the correct column. List expenses in alphabetical order. Total the columns and ensure total debits equal total credits.

EXERCISE 2–10 (LO4)

Required: Prepare journal entries for each of the following transactions:

1. Issued share capital for $3,000 cash.
2. Purchased $2,000 of equipment on credit.
3. Paid $400 cash for this month's rent.
4. Purchased on credit $4,000 of supplies to be used next month.
5. Billed $2,500 to customers for repairs made to date.
6. Paid cash for one-half of the amount owing in transaction (d).
7. Collected $500 of the amount billed in transaction (e).
8. Sold one-half of the equipment purchased in transaction 2 above for $1,000 in cash.

EXERCISE 2–11 (LO2,4)

Required: Prepare the journal entries and likely descriptions of the eleven transactions that were posted to the following General Ledger accounts for the month ended January 31, 2023. Do not include amounts. For instance, the first entry would be:

Cash		Bank Loan		Share Capital		Repair Revenue
1	2		11		1		3
3	5						4
8	10
11
Accounts Receivable		Accounts Payable				Electricity Expense
4		10	2			9
			6
			7
Prepaid Expense						Rent Expense
5	9					7
Unused Supplies						Supplies Expense
2	8					6

EXERCISE 2–12 (LO2,3,4)

The following journal entries were prepared for Elgert Corporation for its first month of operation, January 2023.

Required:

1. Prepare necessary General Ledger T-accounts and post the transactions.
2. Prepare a Trial Balance at January 31, 2023.
3. Prepare an Income Statement and Statement of Changes in Equity for the month ended January 31, 2023 and a Balance Sheet at January 31, 2023.

EXERCISE 2–13 (LO4) Correcting Errors in Journal Entries

Below are transactions that contain errors in the journal entry.

1. Received an invoice from a supplier for advertising in the amount of $150.

2. Paid employee salaries in the amount of $2,200.

3. Received repair services worth $1,500 from a supplier in exchange for a note due in sixty days.

4. Completed service work for a British customer. Invoiced $5,000 GBP (British pounds Sterling funds). The Canadian currency equivalent is $8,400 CAD. (Hint: Recall the monetary unit principle.)

5. Rent of $5,000 cash was paid for the current month's rent.

6. Received a cheque in the amount of $4,000 from a customer for service work to be started in three months.

7. Completed a project for a customer and billed them $8,000 for the service work.

8. Rent of $10,000 for the next six months was paid in advance.

​​​​​​​

Required: Record the correcting journal entries. (Hint: One method is to reverse the incorrect entry and record the correct entry and a second method is to record the correcting amounts to the applicable accounts only.)

Problems

PROBLEM 2–1 (LO3)

The following account balances are taken from the records of Fox Creek Service Limited at October 31, 2015 after its first year of operation:

Accounts Payable	$9,000		Insurance Expense	$ 500
Accounts Receivable	6,000		Repair Revenue	19,000
Advertising Expense	2,200		Supplies Expense	800
Bank Loan	5,000		Telephone Expense	250
Cash	1,000		Truck	9,000
Share Capital	2,000		Truck Operation
Commissions Expense	4,500		Expense	1,250
Equipment	7,000		Wages Expense	4,000
			Wages Payable	1,500

Required:

1. Prepare a Trial Balance at October 31, 2023.
2. Prepare an Income Statement and Statement of Changes in Equity for the year ended October 31, 2023.
3. Prepare a Balance Sheet at October 31, 2023.

PROBLEM 2–2 (LO1,2,3,4)

The following ledger accounts were prepared for Davidson Tool Rentals Corporation during the first month of operation ending May 31, 2023. No journal entries were prepared in support of the amounts recorded in the ledger accounts.

Cash			101		Accounts Payable			210		Share Capital			320		Service Revenue			470
May 1	5,000	May 11	1,000		May 22	600	May 11	1,000				May 1	5,000				May 5	3,000
6	2,000	16	500				23	150									6	2,000
10	1,500	20	300				24	1,100									18	2,500
15	1,200	22	600
21	800	28	400												Advertising Expense			610
		29	3,500												May 31	250
Accounts Receivable			110												Commissions Expense			615
May 5	3,000	May 10	1,500												May 24	1,100
18	2,500	15	1,200
															Rent Expense			654
Prepaid Advertising			160												May 28	400
May 16	500	May 31	250
															Salaries Expense			656
Unused Supplies			173												May 29	3,500
May 20	300	May 30	100
															Supplies Expense			668
Equipment			183												May 30	100
May 11	2,000	May 21	800
															Telephone Expense			669
															May 23	150

Required:

1. Reconstruct the transactions that occurred during the month and prepare journal entries to record these transactions, including appropriate descriptions. Include accounts numbers (Folio) using the Chart of Accounts provided. Calculate the balance in each account.
2. Total the transactions in each T-account above. Prepare a Trial Balance in proper order (list assets, liabilities, equity, revenue, then expenses) at May 31, 2015.

PROBLEM 2–3 (LO1,2,4)

The following balances appeared in the General Ledger of Fenton Table Rentals Corporation at April 1, 2023.

Cash	$1,400	Accounts Payable	$2,000
Accounts Receivable	3,600	Share Capital	4,350
Prepaid Rent	1,000
Unused Supplies	350

The following transactions occurred during April:

1. Collected $2,000 cash owed by a customer.
2. Billed $3,000 to customers for tables rented to date.
3. Paid the following expenses: advertising, $300; salaries, $2,000; telephone, $100.
4. Paid half of the accounts payable owing at April 1.
5. Received a $500 bill for April truck repair expenses.
6. Collected $2,500 owed by a customer.
7. Billed $1,500 to customers for tables rented to date.
8. Transferred $500 of prepaid rent to rent expense.
9. Counted $200 of supplies on hand at April 30; recorded the amount used as an expense.

Required: Prepare journal entries to record the April transactions.

PROBLEM 2–4 (LO1,2,4)

The following transactions occurred in Thorn Accounting Services Inc. during August 2023, its first month of operation.

Aug. 1	Issued share capital for $3,000 cash.
1	Borrowed $10,000 cash from the bank.
1	Paid $8,000 cash for a used truck.
4	Paid $600 for a one-year truck insurance policy effective August 1.
5	Collected $2,000 fees in cash from a client for work performed today (recorded as Feeds Earned).
7	Billed $5,000 fees to clients for services performed to date (recorded as Fees Earned).
9	Paid $250 for supplies used to date.
12	Purchased $500 of supplies on credit (recorded as Unused Supplies).
15	Collected $1,000 of the amount billed on August 7.
16	Paid $200 for advertising in The News during the first two weeks of August.
20	Paid half of the amount owing for the supplies purchased on August 12.
25	Paid cash for the following expenses: rent for August, $350; salaries, $2,150; telephone, $50; truck repairs, $250.
28	Called clients for payment of the balance owing from August 7.
29	Billed $6,000 of fees to clients for services performed to date (recorded as Fees Earned).
31	Transferred the amount of August's truck insurance ($50) to Insurance Expense.
31	Counted $100 of supplies still on hand (recorded the amount used as Supplies Expense).

Required: Prepare journal entries to record the August transactions.

PROBLEM 2–5 (LO4) Challenge Question – Errors in the Trial Balance

Below is the trial balance for Cushio Corp. which contains a number of errors:

Cushio Corp.
Trial Balance
At August 31, 2023
	Incorrect
	Debit	Credit
Cash	$102,000
Accounts receivable	59,730
Prepaid expenses	2,000
Office supplies inventory	5,500
Equipment	115,000
Accounts payable		$74,500
Unearned revenue		50,000
Share capital		25,000
Retained earnings		50,500
Revenue		245,000
Repairs expense	1,000
Rent expense	25,000
Advertising expense	24,500
Salaries expense	115,000
	$449,730	$445,000

The following errors were discovered:

1. Cushio collected $5,000 from a customer and posted a debit to Cash but did not post a credit entry to accounts receivable.
2. Cushio completed service work for a customer for $5,000 and debited accounts receivable but credited unearned revenue.
3. Cushio received cash of $583 from a customer as payment on account and debited cash for $583, but incorrectly credited accounts receivable for $853.
4. Cushio did not post an invoice of $500 received for repairs.
5. Cushio purchased equipment for $5,000 on account and posted the transaction as a debit to accounts payable and a credit to equipment.
6. Cushio purchased advertising services for cash of $6,000 that will be published in the newspapers over the next six months. This transaction was posted as a debit to advertising expense and a credit to cash for $6,000.

Required: Prepare a corrected trial balance. (Hint: Using T-accounts would be helpful.)

PROBLEM 2–6 (LO4) Challenge Question – Transactions, Trial Balance, and Financial Statements

Stellar Services Ltd. is an engineering firm that provides electrical engineering consulting services to various clients. Below are the account balances in its General Ledger as at December 31, 2023 which is its first month of operations. All accounts have normal balances as explained in the text.

Stellar Services Ltd.
Trial Balance
At December 31, 2023
Accounts payable	$115,000
Accounts receivable	85,000
Cash	150,000
Building/warehouse	–
Equipment	45,000
Furniture	15,000
Land	–
Notes payable	20,000
Office equipment	–
Office supplies	7,000
Prepaid expenses	–
Repairs expense	500
Retained earnings	90,000
Salaries expense	32,000
Service revenue	25,000
Share capital	108,000
Unearned service revenue	–
Utilities expense	4,500
Vehicle	19,000

Listed below are activities for Stellar Services Ltd. for the month of January, 2023:

1. Stellar ordered $3,500 in new software from a software supplier. It will be paid when it is ready to install in three weeks.
2. Paid $12,000 for a two-year insurance policy to begin January 1, 2024.
3. Paid one half of the outstanding accounts payable.
4. Hired a new employee who will start up January 1, 2024. His salary will be $2,500 every two weeks.
5. Received cash of $200,000 from a client for a $1,000,000 consulting contract. Work will commence in March.
6. Booked a conference room at a hotel for a presentation to potential customers scheduled for January 15. The $600 rental fee will be paid January 1.
7. Met with a client's lawyer about a fire that destroyed a portion of the client's building. The client is planning to sue Stellar for $300,000 based on some previous consulting services Stellar provided to the client.
8. Completed four electrical inspections today on credit for $3,000 each.
9. Collected from two of the credit customers from item 8.
10. Received $20,000 from a client in partial payment for services to be provided next year.
11. Borrowed $150,000 from their bank by signing a note payable due on July 31, 2025.
12. John Stellar invested $30,000 cash and engineering equipment with a fair value of $10,000 in exchange for capital shares.
13. Stellar rented some additional office space and paid $18,000 for the next six month's rent.
14. Purchased land and a small warehouse for $50,000 cash and a long-term note payable for the balance. The land was valued at $250,000 and the warehouse at $60,000.
15. Signed an agreement with a supplier for equipment rental for a special project to begin on January 23, 2024. A deposit for $300 is to be paid on January 1.
16. Completed $30,000 of services for a client which is payable in 30 days.
17. Purchased $8,000 of equipment for $5,000 cash and a trade-in of some old equipment that originally was recorded at $3,000.
18. Paid $1,000 in cash dividends.
19. Refunded the client $2,000 due to a complaint about the consulting services provided in item 16.
20. Paid salaries of $35,000.
21. Received a bill for water and electricity in the amount of $1,800 for January, which will be paid on February 15.
22. Purchased some office equipment for $5,000 and office supplies for $2,000 on account.
23. Placed an order with a supplier for $10,000 of drafting supplies to be delivered January 10. This must be paid by January 25.

Required:

1. Prepare all required journal entries for December.
2. Prepare the income statement and the statement of changes in equity for the month ended December 31, 2023 and the balance sheet as at December 31, 2023. (Hint: Using T-accounts would be helpful.)

PROBLEM 2–7 (LO4) Special Journals and Subledgers

The following are selected transactions from December, 2025 for Readem & Weep Sad Books Co. Ltd., who purchases and sells books for a profit.

Required: Complete the schedule based on the information in Section 2.4, Special Journals and Subledgers from this chapter. If a transaction has no applicable subledger, leave answer blank.

Journals
Sales	S
Purchases	P
Cash Receipts	CR
Cash Disbursements	CD
General Journal	GJ

Subledgers
Accounts Receivable	AR
Accounts Payable	AP
Merchandise Inventory	MI

Date	Transaction	Journal	Subledger
Dec 1	Issued shares to the company's founder for cash
1	Issued a cheque for rent to the building owner
2	Purchased 100 books on credit from the publisher
4	Borrowed money from bank (i.e. a note payable)
5	Purchased office furniture on account
6	Return 5 books to the publisher due to missing pages
12	Sold 20 books to Fred's Cigar Store on account (credit)
13	Paid cash for a two-year insurance policy effective immediately
15	Paid cash for some office supplies
19	Issued a cheque to the bank for the note payable interest
20	Hired an employee and paid her first week's salary in cash
22	Sold 10 books for cash
27	Fred's Cigar Store returned five of the books purchased earlier and the amount owing was adjusted (accounts receivable)
27	Received cash from Fred's Cigar Store for amount owing
28	Found an error in the accounting records and recorded a correcting entry
29	Received cash from a customer for 100 books. 50% of the books will be sent immediately and the remained to be sent in January
30	A cheque was issued for rent for January, 2026
30	Dividends were paid in cash to the company founder

PROBLEM 2–8 (LO4) Special Journals and Subledgers

Listed below are transactions for the first month of operations for Harmand Ltd., a consulting company who provides engineering consulting services and also sells vintage model airplanes (cost of goods sold ignored for simplicity).

June 1	Purchased equipment on credit from Bradley & Co., $12,000.
2	Billed consulting services completed for Cooper Co., Invoice #17001 for $8,000.
3	Issued cheque #601 to LRS Properties Ltd., for office rent for June, $3,500.
4	Purchased office supplies from Office Supplies Ltd., cheque #602 for $1,240.
6	Sold five vintage model airplanes to Mr. F. Scott on account, Invoice #17002 for $2,500 each.
7	Sold one vintage model airplane as a cash sale, $2,000.
8	Received cash from Cooper Co., for Invoice #17001 for $7,920. Cooper was entitled to an early payment discount of $80 because they paid their account within 10 days of being billed.
9	Paid salary for one employee, cheque #603 for $1,400.
10	Received an invoice from the Daily Gazette for advertising, payable in 30 days; $1,200.
10	Paid 20% of the June 1 equipment purchase; cheque #604.
11	Received a cheque for $5,000 from Fort Robbins Bridge Builders Ltd., for consulting work that will begin July 1;
14	Borrowed $10,000 from the bank as a loan.
18	Issued a receipt for $5,000 for cash payment from F. Scott as a partial payment of their account.
22	Issued 500 additional shares to owner and shareholder for $5,000 cash.
23	Paid utilities bill from last month to HTC Power Corp., cheque #605 for $350.
25	Billed $35,000 of consulting services rendered to Boyzee Villages Corp. Invoice #17003.
28	Paid Daily Gazette amount owing early and received a discount of $12, reducing payment to $1,188, cheque #606.
29	Paid $200 in dividends to Bill Sloan, owner and sole shareholder, cheque #607.
30	Paid $1,000 to pay the interest owing to date of $30 (interest expense) and reduce the bank loan for the balance, cheque #608.
30	Paid salary for employee up to date, cheque #609 for $1,600.
30	Corrected an error in the payment to the bank. Interest expense should be $35 and $965 to reduce the bank loan.

Required:

1. Prepare a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and general journal as shown below. Record the June transactions into these journals. (Ignore GST and account codes for simplicity.)

   Credit Sales Journal

   S1

   Consulting

   Vintage

   Accounts

   Services

   Model

   Date

   Billing #

   Customer

   Ref

   Receivable

   Revenue

   Plane Sales

   Other

   Desc

   Debit

   Credit

   Credit

   Totals

   Credit Purchases Journal

   P1

   Accounts

   Equipment

   Advertising

   Other

   Date

   Invoice #

   Creditor

   Ref

   Payable

   Purchases

   Expense

   Purchases

   Desc

   Credit

   Debit

   Debit

   Debit

   Totals

   Cash Receipts Journal

   CR1

   Sales

   Accounts

   Cash

   Date

   Billing #

   Customer

   Ref

   Cash

   Discount

   Receivable

   Sales

   Other

   Desc

   Debit

   Debit

   Credit

   Credit

   Credit

   Totals

   Cash Disbursements Journal

   CD1

   Purchase

   Accounts

   Other

   Date

   Chq #

   Payee

   Ref

   Cash

   Discount

   Payable

   Disbursements

   Desc

   Credit

   Credit

   Debit

   Debit

   Totals

   General Journal				GJ1
   Date	Account/Explanation	PR	Debit	Credit
   Totals

2. Prepare an accounts receivable subledger, accounts payable subledger, and a general ledger as shown below. Post the journals from part 1 to the subledgers and general ledger as shown in Section 2.4 of this chapter. You will need to create multiple Accounts Receivable and Accounts Payable subledgers, as well as general ledgers.

   Accounts Receivable Subledger
   Name:
   Date	Ref	Debit	Credit	Balance

   Accounts Payable Subledger
   Name:
   Date	Ref	Debit	Credit	Balance

   General Ledger
   Name:
   Date	Ref	Debit	Credit	Balance

3. Prepare a trial balance from the general ledger accounts. Use the format shown in Section 2.3 of this chapter. Ensure that the trial balance debits equal the credits and that the subledgers balance to their respective accounts receivable and accounts payable control accounts.
4. Prepare an income statement, statement of changes in equity and a balance sheet as at June 30, 20XX. Use the format shown in Section 2.3 of this chapter.

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1. Revenues and the issuance of Share Capital are equity accounts. They cause equity to increase so increases in these account types are recorded as credits.

2. Expenses, and Dividends are equity accounts. They cause equity to decrease. Decreases in equity are always recorded as debits so as expenses and dividends are realized, they are debited.

3. The issuance of share capital and revenues cause equity to increase; as indicated above, increases in equity are recorded as credits. Dividends and expenses cause equity to decrease; decreases in equity are recorded as debits.​​​​​​