Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 95

Transaction analysis—various accounts Enter the following column headings across the top of a sheet of paper:

Transaction/	Current	Noncurrent	Current	Noncurrent	Owners	Net
Adjustment	Assets	Assets	Liabilities	Liabilities	Equity	Income

Enter the transaction/adjustment letter in the first column and show the effect, if any, of each transaction/adjustment on the appropriate balance sheet category or on net income by entering for each category affected the account name and amount, and indicating whether it is an addition (+) or a subtraction (-). Items that affect net income should not also be shown as affecting owners’ equity. You may also write the journal entries to record each transaction/adjustment.

a. Income tax expense of $700 for the current period is accrued. Of the accrual, $200 represents deferred income taxes.

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b. Bonds payable with a face amount of $5,000 are issued at a price of 99.

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c. Of the proceeds from the bonds in part b, $3,000 is used to purchase land for future expansion.

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d. Because of warranty claims, finished goods inventory costing $64 is sent to customers to replace defective products.

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e. A three-month, 12% note payable with a face amount of $20,000 was signed. The bank made the loan on a discount basis.

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f. The next installment of a long-term serial bond requiring an annual principal repayment of $35,000 will become due within the current year.

Step 1 of 2

Transaction Analysis:

Transaction Analysis is the process of segregating the differences made to each side of the equation with every new financial transaction. 

Transaction analysis–Various accounts

The horizontal model presentation for the provided transactions with prescribed headings is as follows:

Horizontal model presentation (Transaction analysis)
Transactions/Adjustment	Current Assets	Noncurrent Assets	Current Liabilities	Noncurrent Liabilities	Owner's equity	Net Income
a)			Income Taxes Payable (+) 500	Deferred Income Taxes (+) 200		Income Tax Expense (-) 700
b)	Cash (+) 4,950			Bonds Payable (+) 5,000 ; Discount on Bonds Payable (-) 50
c)	Cash (-) 3,000	Land (+) 3,000
d)	Inventory (-) 64		Estimated Warranty Liability (-) 64
e)	Cash (+) 19,400		Notes Payable (+) 20,000 ; Discount on notes Payable (-) 600
f)			Current maturities of Long-term Debt (+) 35,000	Serial Bonds Payable (-) 35,000	(+) 21,000	(-) 97,000