Exercise 13-16 Presented below is a list of possible transactions. Analyze the e

ID: 2609223 • Letter: E

Question

Exercise 13-16

Presented below is a list of possible transactions.

Analyze the effect of the 18 transactions on the financial statement categories indicated.

Transactions

Assets

Liabilities

Owners’ Equity

Net Income

Transactions

Assets

Liabilities

Owners’ Equity

Net Income

1. Purchased inventory for $80,000 on account (assume perpetual system is used).

DecreaseIncreaseNo net effect

2. Issued an $80,000 note payable in payment on account (see item 1 above).

DecreaseIncreaseNo net effect

3. Recorded accrued interest on the note from item 2 above.

DecreaseIncreaseNo net effect

4. Borrowed $100,000 from the bank by signing a 6-month, $112,000, zero-interest-bearing note.

DecreaseIncreaseNo net effect

5. Recognized 4 months’ interest expense on the note from item 4 above.

DecreaseIncreaseNo net effect

6. Recorded cash sales of $75,260, which includes 6% sales tax.

DecreaseIncreaseNo net effect

7. Recorded wage expense of $35,000. The cash paid was $25,000; the difference was due to various amounts withheld.

DecreaseIncreaseNo net effect

8. Recorded employer’s payroll taxes.

DecreaseIncreaseNo net effect

9. Accrued accumulated vacation pay.

DecreaseIncreaseNo net effect

10. Recorded an asset retirement obligation.

DecreaseIncreaseNo net effect

11. Recorded bonuses due to employees.

DecreaseIncreaseNo net effect

12. Recorded a contingent loss on a lawsuit that the company will probably lose.

DecreaseIncreaseNo net effect

13. Accrued warranty expense (assume expense warranty approach).

DecreaseIncreaseNo net effect

14. Paid warranty costs that were accrued in item 13 above.

DecreaseIncreaseNo net effect

15. Recorded sales of product and related service-type warranties.

DecreaseIncreaseNo net effect

16. Paid warranty costs under contracts from item 15 above.

DecreaseIncreaseNo net effect

17. Recognized warranty revenue (see item 15 above).

DecreaseIncreaseNo net effect

18. Recorded estimated liability for premium claims outstanding.

DecreaseIncreaseNo net effect

Explanation / Answer

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Transactions Assets Liabilities Owners’ Equity Net Income 1 Purchased inventory for $80,000 on account (assume perpetual system is used). No effect - No info on opening and closimng stock Increase Decrease - Profit decreased Decrease - Inc in COGS resulting decrease in income 2 Issued an $80,000 note payable in payment on account (see item 1 above). No effect No effect - Due to liability shifted from account payable to notes payable No effect No effect 3 Recorded accrued interest on the note from item 2 above. No effect Increase - Liability increased due to interest payable Decrease - Profit reduced Decrease - Interest Expense 4 Borrowed $100,000 from the bank by signing a 6-month, $112,000, zero-interest-bearing note. Increase - Amount received Increased - New loan liability created No effect No effect 5 Recognized 4 months’ interest expense on the note from item 4 above. No effect Increased - Interest booked Decrease - Profit reduced Decrease - Interest Expense booked 6 Recorded cash sales of $75,260, which includes 6% sales tax. Increase - Cash received Increase - Due to VAT liability@ 6% on sales Increase - Profit increased Increase - Sales Revenue booked 7 Recorded wage expense of $35,000. The cash paid was $25,000; the difference was due to various amounts withheld. Decrease - Cash outflow happened Increase - Still 10,000 not yet paid Decrease - Profit reduced Decrease - Wage Expense booked 8 Recorded employer’s payroll taxes. No effect Increase - Expense booking with liability Decrease - Profit reduced Increase - Expense booking 9 Accrued accumulated vacation pay. No effect Increase - Expense booking with liability Decrease - Profit reduced Increase - Expense booking 10 Recorded an asset retirement obligation. Increase - Present value of cost incurred at the time of disposal will be capitalised by debiting asset and crediting liability Increase - Present value of cost incurred at the time of disposal will be capitalised by debiting asset and crediting liability No effect No effect 11 Recorded bonuses due to employees. No effect Increase - Expense booking with liability Decrease - Profit reduced Increase - Expense booking 12 Recorded a contingent loss on a lawsuit that the company will probably lose. No effect Increase - Liability booked. Only if it is probable and the amount can be estimated, if not No effect Decrease - Profit reduced Increase - Loss booked. Only if it is probable and the amount can be estimated, if not No effect 13 Accrued warranty expense (assume expense warranty approach). No effect Increase - Expense booking with liability Decrease - Profit reduced Increase - Expense booking 14 Paid warranty costs that were accrued in item 13 above. Decrease - Cash paid Decrease - Liability accrued was dicharged by payment No effect No effect 15 Recorded sales of product and related service-type warranties. No effect Increase - Liability booked Increase - Profit increased Increase - Sales revenue booked and Decrease - Warranty exp booked 16 Paid warranty costs under contracts from item 15 above. Decrease - Cash outflow happened Decrease - Liability accrued was dicharged by payment No effect No effect 17 Recognized warranty revenue (see item 15 above). No effect Decrease - Liability booked now reversed Increase - Profit increased Increse - income booking 18 Recorded estimated liability for premium claims outstanding. No effect Increase - Liability booked Decrease - Profit reduced Increase - Expense booked Comments: Usually in business, the net results of all P&L items will be transferred to owners equity instead of item by item.

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Exercise 13-16 Presented below is a list of possible transactions. Analyze the e

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