Chapter 3

The Accounting Method

Exercises

Main lecturer: Encarna Guillamon Saorin

[email protected]
2-1

EXERCISE 3-1
There are 3 broad categories of accounts:
assets, liabilities and owners’ equity
• Give a short synonym for an asset and a
liability. Then list several individual assets
and several specific liabilities
• Identify 2 categories of transactions that
increase owners’ equity and 2 categories
that decrease it
2-2

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EXERCISE 3-2
Accounting has its own vocabulary and basic
relationships. Match the accounting terms at left with
the corresponding definition or meaning at right:
1. Receivable A. Using up assets in the
2. Owners‘ Equity course of operating a
business
3. Expense
B. Distribution of earnings
4. Net Income
C. Always a liability
5. Payable
D. Revenues – Expenses
6. Dividends
E. Always an asset
F. Assets – Liabilities 2-3

EXERCISE 3-3
• Antonio Sevilla opened a medical practice. The
business completed the following transactions:
- Sevilla invested $64,000 cash to start his medical
practice. The business issued stock to Sevilla
- Purchased medical supplies on account for
$9,000 and paid monthly office rent of $4,000
- Recorded $5,000 revenue for service rendered to
patients. Received cash of $2,000 and sent bills
to patients for the remainder
• After these transactions, how much cash and
how much in accounts receivable has the
2-4
business?

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 EXERCISE 3-4
• Jacob Marr opened a medical practice. During the
first month of operation (February), his business, JM
& Co., experienced the following events:
a) Dec. 6: Marr invested $25,000 in the business, which in turn
issued its common stock to him
b) Dec. 9: the business paid cash for land costing $15,000.
Marr plans to build an office building on the land
c) Dec. 12: the business purchased medical supplies for
$2,000 on account
d) Dec. 15: JM & Co. officially opened for business
e) Dec. 15-28: during the rest of the month, Marr treated
patients and earned service revenue of $8,000, receiving
cash for half the revenue earned 2-5

EXERCISE 3-4 (continued)

f) Dec. 15-28: the business paid cash expenses: employee
salaries, $1,400; office rent, $1,000; utilities, $300
g) Dec. 28:
- The business sold supplies to another physician for
cost of $500, receiving cash
- The business borrowed $10,000, signing a note
payable to the bank
- The business paid $1,500 on account

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 EXERCISE 3-4 (continued)
1. Analyze the effects of these events on the accounting
equation of the medical practice of JM & Co. Use headings
for Cash, Accounts Receivable, Medical Supplies, Land,
Accounts Payable, Notes Payable, Common Stock, and
Retained Earnings
2. After completing the analysis, answer these questions about
the business:
a. How much are total assets?
b. How much does the business expect to collect from
patients?
c. How much does the business owe in total?
d. How much net income or net loss did the business
experience during its first month of operations? 2-7

EXERCISE 3-5
• Donna Schulz Professional Corporation, completed
these transactions during the month of December:
a) Dec. 2: received $7,000 cash from Schulz. Issued
common stock to her
b) Dec. 2: paid monthly office rent, $500
c) Dec. 3: paid cash for a Dell computer, $3,000. The
computer is expected to remain in service for five
years
d) Dec. 4: purchased office furniture on account,
$3,600. The furniture should last for five years
e) Dec. 5: purchased supplies on account, $300 2-8

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 EXERCISE 3-5 (continued)
f) Dec. 9: performed tax service for a client and
received cash for the full amount of $800
g) Dec. 12: paid utility expenses, $200
h) Dec. 18: performed consulting service for a client
on account, $1,700
• Set up T-accounts for: Service Revenue, Rent
Expense, Utilities Expense, and Salary Expense

2-9

EXERCISE 3-6
• Sylvania Learning System, Inc., engaged in the
following transactions during June 2014, its first
month of operations:
a) Jun 1: received $36,000 and issued common stock
b) Jun 2: purchased $800 of office supplies on
account
c) Jun 4: paid $14,000 cash for land to use as a
building site
d) Jun 6: performed service for customers and
received cash, $2,000
e) Jun 9: paid $100 on accounts payable 2-10

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 EXERCISE 3-6 (continued)
f) Jun 17: performed service for customers on
account, $1,200
g) Jun 23: received $1,200 cash from customers on
account
h) Jun 30: paid the following expenses: salary,
$1,000; rent, $500
• Set up T-accounts to register these transactions

2-11

EXERCISE 3-7
• After operating for several months, attorney Monica
Peres completed the following transactions during
the latter part of October:
a) Oct. 15: borrowed $35,000 from the bank, signing a
note payable
b) Oct. 22: performed service for clients on account,
$4,000
c) Oct. 30: received cash on account from clients,
$1,000
d) Oct. 31: received a utility bill, $200, which will be
paid during November
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 EXERCISE 3-7 (continued)
e) Oct. 31: paid monthly salary to assistant, $3,000
f) Oct. 31: paid interest expense of $300 on the bank
loan
• Journalize the transactions of Monica Peres,
Attorney

2-13

EXERCISE 3-8
• Refer to the data in the preceding Exercise
3-5 regarding Donna Schulz Professional
Corporation
• Journalize the transactions

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 EXERCISE 3-9
• Refer to the data in the preceding Exercise
3-5 regarding Donna Schulz Professional
Corporation
• Post to the T-accounts the journalized
transactions

2-15

EXERCISE 3-10
• Kermit Larson opened a law office on September 3.
During the first month of operations, the business
completed the following transactions:
a) Sep. 3: Larson transferred $20,000 cash from his personal
bank account to a business account entitled Kermit Larson
Corporation. The company issued common stock to Larson
b) Sep. 4: purchased supplies, $200, and furniture, $1,800, on
account
c) Sep. 6: performed legal services for a client and received
$1,000 cash
d) Sep. 7: paid $15,000 cash to acquire land for an office site
e) Sep. 10: defended a client in court, billed the client, and
received his promise to pay the $600 within one week 2-16

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 EXERCISE 3-10 (continued)
f) Sep. 14: paid for the furniture purchased September 4 on
account
g) Sep. 16: paid the telephone bill, $120
h) Sep. 17: received partial payment from client on account,
$500
i) Sep. 24: paid the water and electricity bills, $110
j) Sep. 28: received $1,500 cash for helping a client sell real
estate
k) Sep. 30: paid secretary's salary, $1,200
l) Sep. 30: declared and paid dividends of $2,400

2-17

EXERCISE 3-10 (continued)

• Set up the following T-accounts: Cash, Accounts
Receivable, Supplies, Furniture, Land, Accounts
Payable, Common Stock, Dividends, Service
Revenue, Salary Expense, and Utilities Expense
1. Record each transaction in the journal, using
the account titles given. Key each transaction
by date
2. Using transaction dates as posting references,
post the transactions to the T-accounts. Label
the ending balance of each account Bal.

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 EXERCISE 3-11
• Refer to the data in the preceding Exercise
3-10 regarding Kermit Larson Corporation
• Prepare the trial balance of Kermit Larson
at September 30

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