Corporate Financial Accounting Study Set 3

Business

Quiz 2 :

Analyzing Transactions

Quiz 2 :

Analyzing Transactions

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McIntyre Company adheres to a policy of depositing all cash receipts in a bank account and making all payments by check. The cash account as of December 31 has a credit balance of $1,850, and there is no undeposited cash on hand. (a) Assuming that no errors occurred during journalizing or posting, what caused this unusual balance? (b) Is the $1,850 credit balance in the cash account an asset, a liability, owner's equity, a revenue, or an expense?
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a. The unusual balance could be caused due to expenses being more than the revenue. It simply implies that amount expended is more than cash earned or in hand.b. Cash balance is an asset and is shown under assets in the balance sheet. The normal balance of cash should be debit. A credit balance means an unusual balance.

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Continuing Company Analysis-Amazon: Horizontal analysis Amazon.com, Inc. is the largest Internet retailer in the United States. Amazon's income statements through income from operations for two recent years follow: img A. Prepare a horizontal analysis of the operating income statements. (Round percentages to one decimal place.) B. Interpret the results of the horizontal analysis.
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Horizontal analysis of company a showing calculates relationships between items in operating income statement. It shows year-to-year changes in sales and expenses amounts in operating income statements
Company A is retailer trader who is operating business online. Company's sales and expenses are in millions. They involve material and service products both, and expenses are accordingly. Their operating expenses are indirect expenses. Horizontal analysis shows comparison of change in amounts from year to year.
1. img Above statement is prepared using MS Excel with appropriate formula
img In above statement there are two sides shown in T shape, one is debit and other is credit. Debit side of statement shows expenses. Credit side of statement is showing sales which are income credit.
Income from operations is showing balancing figure of total of both the sides. This is matching with basic accounting equation where sales less cost gives income.  
2.By comparing the results of year 1 and year 2, it can be concluded that though in the year2, there is an increase in the total sales, still there is a huge decrease in the profit. This happened due to increase in the operating expenses. This is figure comparison done in horizontal analysis.

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The transactions completed by PS Music during June 2018 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the business's operations: img img PS Music's chart of accounts and the balance of accounts as of July 1, 2018 (all normal balances), are as follows: Instructions 1. Enter the July 1, 2018, account balances in the appropriate balance column of a four-column account. Write Balance in the Item column, and place a check mark (?) in the Posting Reference column. ( Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 2018.
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Ledger Posting: It is the second process of recording transactions. The debit and credit amounts need to transfer in their corresponding four column accounts of ledger from journal entries. The T account format has substituted with the standard account. Hence, the following account shows the ledger posting of the journal entries.
Journal Entry: Entries which help in recording of transactions that has occurred in the accounting process. The respective amounts to account names involved in the transactions are credited and debited under it.
Trial Balance: It is a basic tool that lists the ending balances of each account. In the transactions of the business are represented in a summarized form. Its main purpose is to balance the value of debit column with the value of credit column.
The errors can be detected, if the total of both columns doesn't match. The reason behind occurrence of any errors is not related to trial balance and the same kind of errors needs to rectify by passing journal entries.
1.Ledger account to show the account balance on July 1, 2018 of PS Music is as follows
Cash account: It is based on real account concept, which states that debit is "what comes in" and credit is "what goes out".
img Accounts Receivables the Assets that indicate the amount received for sale of asset on credit. It is generally payable within few months of such credit sale that can be extended up to one year only
img Supplies are items which are issued to factory for supporting production. When any supplies purchased for cash are debited and vice a versa in case of return of supplies by company.
img Accounts Payable is the liability that indicates the amount due for purchased asset on credit. It is generally payable within few months of such credit purchase that can be extended up to one year only
img Stock and Shares that are authorized to make issue by the company can be said as capital stock. Generally, it consist the securities that are issued by the company for raising the funds.
img Dividends are payment in form of return to stockholders out of profits earned by business during the particular year. Generally, it is distributed as a pre-determined percent of last year profit.
img Service revenue is the revenue generated from rendering the services after making the payment for the expenses incurred in rendering those services.
img Wages expenses are the expenses incurred for paying wages to the employees. This ledger is based on nominal rule. Hence, it is debited
img Office rent expenses are the expenses incurred for paying rent for premises of the office. This ledger is based on nominal rule. Hence, it is debited
img Equipment rent expenses is the expenses incurred on hiring of plant and its tools for the equipment uses in the business for a particular period of time.
img Utility expenses are the cost of usage of utilities during accounting period it is the part of operating expense of the income statement in business
img Music expense is the expenses paid towards the repair and maintenance of the equipment of the music. img Advertising expenses are the expenses paid towards the promotion of the products to aware the customer about the product to increase in sale
img Supplies are items which are issued to factory for supporting production. When any supplies purchased for cash are debited and vice a versa in case of return of supplies by company.
img Miscellaneous expenses are the expenses paid towards purchased miscellaneous items of the company. It always has debit balance and shown as expense in income statement
img 2.The required Journal entries for the transaction on July of PS Music is as follows
The required journal entry for the common stock issued for cash as follows:
img Being common stock issued for cash has been recorded in the books of account by debiting the cash account and by crediting the common stock account with the same amount.
The required journal entry for the payment of Rent expense as follows:
img Being rent paid has been recorded in the books of account by debiting the rent account and by crediting the cash account with the same amount.
The required journal entry for the cash payment of insurance has been recorded as follows:
img Being cash paid for insurance has been recorded in the books of account by debiting the Prepaid Insurance account and by crediting the cash account with the same amount.
The required journal entry for the cash received on account has been recorded in the books of account as follows:
img Being cash received on account has been recorded in the books of account by debiting the cash account and by crediting the account receivable account with the same amount.
The required journal entry for the Fees in advance has been recorded in the books of account as follows:
img Being received Fees in advance has been recorded in the books of account by debiting the Cashaccount and by crediting the unearned Fees account with the same amount.
The required journal entry for the cash paid to the accounts payable has been recorded in the books of account as follows:
img Being cash paid on account has been recorded in the books of account by debiting the accounts payable account and by crediting the cashaccount with the same amount.
The required journal entry for the payment of Miscellaneous expense as follows:
img Being cash paid for miscellaneous expenses has been recorded in the books of account by debiting the miscellaneous expenses account and by crediting the cash account with the same amount.
The required journal entry for the payment of office equipment expense as follows:
img Being equipment purchased on account has been recorded in the books of account by debiting the Office equipment account and by crediting the accounts payable account with the same amount.
The required journal entry for the payment of advertisement expense as follows:
img Being cash paid for advertisement has been recorded in the books of account by debiting the advertising expenses account and by crediting the cash account with the same amount.
The required journal entry for the received fees from clients as follows:
img Being cash received from clients has been recorded in the books of account by debiting the cash account and by crediting the Fees earned account with the same amount.
The required journal entry for the payment of rent as follows:
img Being equipment rent paid has been recorded in the books of account by debiting the equipment rent account and by crediting the cash account with the same amount.
The required journal entry for the payment of wages expense as follows
img Being wages paid has been recorded in the books of account by debiting the Wages expenses account and by crediting the cash account with the same amount.
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The required journal entry cash received from clients has been recorded as follows:
img Being cash received from clients has been recorded in the books of account by debiting the cash account and by crediting the Fees earned account with the same amount.
The required journal entry cash received from clients has been recorded as follows:
img Being supplies purchased on account has been recorded in the books of account by debiting the suppliesaccount and by crediting the accounts payable account with the same amount.
The required journal entry cash received from clients has been recorded as follows:
img Being cash paid for miscellaneous expenses has been recorded in the books of account by debiting the miscellaneous expenses account and by crediting the cash account with the same amount.
The required journal entry for the payment of advertisement expense as follows:
img Being cash paid for advertisement has been recorded in the books of account by debiting the advertising expenses account and by crediting the cash account with the same amount.
The required journal entry for the payment of advertisement expense as follows:
img Being Service rendered in account and cash has been recorded in the books of account by debiting the Accounts receivable account and cash account and by crediting the service Fees account with the same amount.
The required journal entry for the payment of Utility expense as follows:
img Being electric bill paid has been recorded in the books of account by debiting the Utility expenses account and by crediting the cash account with the same amount.
The required journal entry for the payment of Wages expense as follows:
img Being wages paid has been recorded in the books of account by debiting the Wages expenses account and by crediting the cash account with the same amount.
The required journal entry for the payment of Miscellaneous expenses as follows:
img Being cash paid for miscellaneous expenses has been recorded in the books of account by debiting the miscellaneous expenses account and by crediting the cash account with the same amount.
The required journal entry for the accounts receivable account and cash account and by crediting the service Fees account as follows:
img Being Service rendered in account and cash has been recorded in the books of account by debiting the Accounts receivable account and cash account and by crediting the service Fees account with the same amount.
The required journal entry for the cash received from clients has been recorded in the books of account as follows:
img Being cash received from clients has been recorded in the books of account by debiting the cash account and by crediting the Fees earned account with the same amount.
The required journal entry for the cash paid for music expenses has been recorded in the books of account as follows:
img Being cash paid for music expenses has been recorded in the books of account by debiting the music expenses account and by crediting the cash account with the same amount.
The required journal entry for cash paid for Dividend has been recorded in the books of account as follows:
img Being cash paid for Dividend has been recorded in the books of account by debiting the Dividend account and by crediting the cash account with the same amount.
3.
Ledger entries for the transaction ofJuly, 2018 of PS Music is as follows
Cash account: It is based on real account concept, which states that debit is "what comes in" and credit is "what goes out".
img Accounts Receivables the Assets that indicate the amount received for sale of asset on credit. It is generally payable within few months of such credit sale that can be extended up to one year only
img Supplies are items which are issued to factory for supporting production. When any supplies purchased for cash are debited and vice a versa in case of return of supplies by company.
img Final, debit balance of supplies is said to be assets. It cannot be termed as expenses unless it is issued.
Accounts Payable is the liability that indicates the amount due for purchased asset on credit. It is generally payable within few months of such credit purchase that can be extended up to one year only.
img Stock and Shares that are authorized to make issue by the company can be said as capital stock. Generally, it consist the securities that are issued by the company for raising the funds.
img Dividends are payment in form of return to stockholders out of profits earned by business during the particular year. Generally, it is distributed as a pre-determined percent of last year profit.
img If dividend is already paid, the deduction of respective amount need to make from retained earnings under shareholders' fund. If it is payable, it is an item of liability that would be shown in balance sheet.
Hence, all journal entries are posted to their ledger accounts
Fees earned are revenue that indicates the amount received for sale of services. It is generally payable within few months of such credit services that can be extended up to one year only
img Wages expenses are the expenses incurred for paying wages to the employees. This ledger is based on nominal rule. Hence, it is debited
img Office rent expenses are the expenses incurred for paying rent for premises of the office. This ledger is based on nominal rule. Hence, it is debited
img Equipment rent expenses is the expenses incurred on hiring of plant and its tools for the equipment uses in the business for a particular period of time.
img Utility expenses are the cost of usage of utilities during accounting period it is the part of operating expense of the income statement in business.
img Music expense is the expenses paid towards the repair and maintenance of the equipment of the music
img Advertising expenses are the expenses paid towards the promotion of the products to aware the customer about the product to increase in sale
img Supplies are items which are issued to factory for supporting production. When any supplies purchased for cash are debited and vice a versa in case of return of supplies by company.
img Miscellaneous expenses are the expenses paid towards purchased miscellaneous items of the company. It always has debit balance and shown as expense in income statement
img The balance of miscellaneous expense of $2,475 is an indirect expense that needs to show as expenses in income statement.
Prepaid insurance is current assets which indicates the insurance paid in advance for the current year which has not been expired
img Unearned revenue refers to income received for estimated goods and service from the company, firm or any individual which is expected to be fulfilled all the dues in future time
img Office equipment the expense which is paid for occupying the assets for using in office premises which helps a firm in running its daily business operations.
img 4.
Trial balance refers to a statement designed to check the arithmetical accuracy of the ledger accounts. It shows the aggregate of all debit and credit balance at the end of the accounting period.
The following unadjusted trial balance has presenting the balances of the accounts on its debit or credit side of PS Music as on July 31, 2018.
img Above trail balance shows the total amount of $40,750 on both sides.

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Rules of debit and credit and normal balances State for each account whether it is likely to have (A) debit entries only, (B) credit entries only, or (C) both debit and credit entries. Also, indicate its normal balance. 1. Accounts Payable 2. Cash 3. Dividends 4. Miscellaneous Expense 5. Insurance Expense 6. Fees Earned
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Entries into T accounts and trial balance Ken Jones, an architect, organized Jones Architects on April 1, 2018. During the month, Jones Architects completed the following transactions: A. Transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $18,000. B. Purchased used automobile for $19,500, paying $2,500 cash and giving a note payable for the remainder. C. Paid April rent for office and workroom, $3,150. D. Paid cash for supplies, $1,450. E. Purchased office and computer equipment on account, $6,500. F Paid cash for annual insurance policies on automobile and equipment, $2,400. G. Received cash from a client for plans delivered, $12,000. H. Paid cash to creditors on account, $1,800. I. Paid cash for miscellaneous expenses, $375. J. Received invoice for blueprint service, due in May, $2,500. K. Recorded fees earned on plans delivered, payment to be received in May, $15,650. L. Paid salary of assistant, $2,800. M. Paid cash for miscellaneous expenses, $200. N. Paid installment due on note payable, $300. O. Paid gas, oil, and repairs on automobile for April, $550. Instructions 1. Record these transactions directly in the following T accounts, without journalizing: Cash, Accounts Receivable, Supplies, Prepaid Insurance, Automobiles, Equipment, Notes Payable, Accounts Payable, Common Stock, Professional Fees, Rent Expense, Salary Expense, Blueprint Expense, Automobile Expense, Miscellaneous Expense. To the left of each amount entered in the accounts, place the appropriate letter to identify the transaction. 2. Determine account balances of the T accounts. Accounts containing a single entry only (such as Prepaid Insurance) do not need a balance. 3. Prepare an unadjusted trial balance for Jones Architects as of April 30, 2018. 4. Determine the net income or net loss for April.
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Ethics in Action Buddy Dupree is the accounting manager for On-Time Geeks, a tech support company for individuals and small businesses. As part of his job, Buddy is responsible for preparing the company's trial balance. His supervisor placed a "hard deadline" of Friday at 5 pm for the completion of the trial balance. Unfortunately, Buddy was unable to get the trial balance to balance by the due date. The credit side of the trial balance exceeded the debit side by $3,000. To make the deadline, Buddy decided to add a $3,000 debit to the vehicles account balance. He selected the vehicles account because it will not be significantly affected by the additional $3,000. 1. Is Buddy behaving ethically? Why? 2. Who is affected by Buddy's decision? 3. How should Buddy have handled this situation?
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Journal entry for fees earned Prepare a journal entry on August 13 for cash received for services rendered, $9,000.
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Chipotle: Horizontal analysis Chipotle Mexican Grill, Inc. is a quick-service restaurant providing a focused menu of burritos, tacos, and salads. Chipotle's balance sheets for the end of two recent years are as follows: img A. Prepare a horizontal analysis of the two balance sheets. (Round percentages to one decimal place.) B. Interpret the horizontal analysis with respect to the change in total assets, total liabilities, and total stockholders' equity. (Treasury stock will be discussed in a later chapter and may be omitted from your analysis.)
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Chart of accounts Oak Interiors is owned and operated by Fred Biggs, an interior decorator. In the ledger of Oak Interiors, the first digit of the account number indicates its major account classification (1-assets, 2-liabilities, 3-owner's equity, 4-revenues, 5-expenses). The second digit of the account number indicates the specific account within each of the preceding major account classifications. Match each account number with its most likely account in the list that follows. The account numbers are 11, 12, 13, 21, 31, 32, 41, 51, 52, and 53. img
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Target: Horizontal analysis The following data (in millions) are taken from the financial statements of Target Corporation , the owner of Target stores: img A. For Target, determine the amount of change in millions and the percent of change (rounded to one decimal place) from Year 1 to Year 2 for: 1. Revenue 2. Operating expenses 3. Operating income B. What conclusions can you draw from your analysis of the revenue and total operating expenses?
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Journal entry for asset purchase Prepare a journal entry for the purchase of office supplies on March 9 for $1,775, paying $275 cash and the remainder on account.
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Chart of accounts The following accounts appeared in recent financial statements of Delta Air Lines : img Identify each account as either a balance sheet account or an income statement account. For each balance sheet account, identify it as an asset, a liability, or owner's equity. For each income statement account, identify it as a revenue or an expense.
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Journal entries and trial balance On November 1, 2018, Kris Lehman established an interior decorating business, Modern Designs. During the month, Kris completed the following transactions related to the business: img Instructions 1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Explanations may be omitted. img 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted. 3. Prepare an unadjusted trial balance for Modern Designs as of November 30, 2018. 4. Determine the excess of revenues over expenses for November. 5. Can you think of any reason why the amount determined in (4) might not be the net income for November?
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What is the difference between an account and a ledger?
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Do the terms debit and credit signify increase or decrease, or can they signify either? Explain.
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Chart of accounts Outdoor Leadership School is a newly organized business that teaches people how to inspire and influence others. The list of accounts to be opened in the general ledger is as follows: img List the accounts in the order in which they should appear in the ledger of Outdoor Leadership School and assign account numbers. Each account number is to have two digits: the first digit is to indicate the major classification (1 for assets, for example), and the second digit is to identify the specific account within each major classification (11 for Cash, for example).
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Journal entries and trial balance On October 1, 2018, Jay Crowley established Affordable Realty, which completed the following transactions during the month: A. Jay Crowley transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $40,000. B. Paid rent on office and equipment for the month, $4,800. C. Purchased supplies on account, $2,150. D. Paid creditor on account, $1,100. E. Earned sales commissions, receiving cash, $18,750. F. Paid automobile expenses (including rental charge) for month, $1,580, and miscellaneous expenses, $800. G. Paid office salaries, $3,500. H. Determined that the cost of supplies used was $1,300. I. Paid dividends, $1,500. Instructions 1. Journalize entries for transactions (A) through (I), using the following account titles: Cash, Supplies, Accounts Payable, Common Stock, Dividends, Sales Commissions, Rent Expense, Office Salaries Expense, Automobile Expense, Supplies Expense, Miscellaneous Expense. Explanations may be omitted. 2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances after all posting is complete. Accounts containing only a single entry do not need a balance. 3. Prepare an unadjusted trial balance as of October 31, 2018. 4. Determine the following: A. Amount of total revenue recorded in the ledger. B. Amount of total expenses recorded in the ledger. C. Amount of net income for October. 5. Determine the increase or decrease in retained earnings for October.
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Team Activity In teams, select a public company that interests you. Obtain the company's most recent annual report on Form 10-K. The Form 10-K is a company's annually required filing with the Securities and Exchange Commission (SEC). It includes the company's financial statements and accompanying notes. The Form 10-K can be obtained either (A) from the investor relations section of the company's Web site or (B) by using the company search feature of the SEC's EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html. Based on the information in the company's most recent annual report, answer the following questions: 1. What amount of total assets does the company report on its balance sheet? 2. What amount of total liabilities does the company report on its balance sheet? 3. Using the accounting equation, determine the company's stockholders' equity. Compare this amount to the amount of stockholders' equity reported on the company's balance sheet. 4. How many years of information are reported on the company's income statement? 5. How many years of information are reported on the company's balance sheet? 6. What is the difference between the information reported on the income statement and the information reported on the balance sheet?
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Entries into T accounts and trial balance Marjorie Knaus, an architect, organized Knaus Architects on January 1, 2018. During the month, Knaus Architects completed the following transactions: A. Issued common stock to Marjorie Knaus in exchange for $30,000. B. Paid January rent for office and workroom, $2,500. C. Purchased used automobile for $28,500, paying $6,000 cash and giving a note payable for the remainder. D. Purchased office and computer equipment on account, $8,000. E. Paid cash for supplies, $2,100. F. Paid cash for annual insurance policies, $3,600. G. Received cash from client for plans delivered, $9,000. H. Paid cash for miscellaneous expenses, $2,600. I. Paid cash to creditors on account, $4,000. J. Paid installment due on note payable, $1,875. K. Received invoice for blueprint service, due in February, $5,500. L. Recorded fees earned on plans delivered, payment to be received in February, $31,400. M. Paid salary of assistants, $6,000. N. Paid gas, oil, and repairs on automobile for January, $1,300. Instructions 1. Record these transactions directly in the following T accounts, without journalizing: Cash, Accounts Receivable, Supplies, Prepaid Insurance, Automobiles, Equipment, Notes Payable, Accounts Payable, Common Stock, Professional Fees, Salary Expense, Blueprint Expense, Rent Expense, Automobile Expense, Miscellaneous Expense. To the left of the amount entered in the accounts, place the appropriate letter to identify the transaction. 2. Determine account balances of the T accounts. Accounts containing a single entry only (such as Prepaid Insurance) do not need a balance. 3. Prepare an unadjusted trial balance for Knaus Architects as of January 31, 2018. 4. Determine the net income or net loss for January.
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Journal entries and trial balance On August 1, 2018, Rafael Masey established Planet Realty, which completed the following transactions during the month: A. Rafael Masey transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $17,500. B. Purchased supplies on account, $2,300. C. Earned sales commissions, receiving cash, $13,300. D. Paid rent on office and equipment for the month, $3,000. E. Paid creditor on account, $1,150. F. Paid dividends, $1,800. G. Paid automobile expenses (including rental charge) for month, $1,500, and miscellaneous expenses, $400. H. Paid office salaries, $2,800. I. Determined that the cost of supplies used was $1,050. Instructions 1. Journalize entries for transactions (A) through (I), using the following account titles: Cash, Supplies, Accounts Payable, Common Stock, Dividends, Sales Commissions, Rent Expense, Office Salaries Expense, Automobile Expense, Supplies Expense, Miscellaneous Expense. Journal entry explanations may be omitted. 2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance. 3. Prepare an unadjusted trial balance as of August 31, 2018. 4. Determine the following: A. Amount of total revenue recorded in the ledger. B. Amount of total expenses recorded in the ledger. C. Amount of net income for August. 5. Determine the increase or decrease in retained earnings for August.
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