Accounting Exercise 2.1 (Accounting for Accruals)
Fored Company experienced the following transactions during 20X7 and 20X8.
Transactions for 20X7:
1) The business was started when the owners contributed $6,000 in cash;
2) Upon providing services to customers, Fored Company recognized $2,000
of revenue on account;
3) Collected $1,500 cash from customers (see Event No.2);
4) Paid $400 in cash for rent expense;
5) Paid $300 in cash for salaries expense;
6) On September 31, 20X7 invested $2,500 in a certificate of deposit (term
- 12 months, rate of interest - 8%);
Adjusting entries at the end of 20X7 accounting period:
7) Accrued salary expense amounting to $1,200;
8) Accrued interest revenue on the certificate of deposit.
Transactions for 20X8:
1) Paid off salaries payable in the entire amount (Event No.7 for 20X7
- $1,200);
2) Earned revenue on account of $4,000;
3) Received cash on accounts receivable of 3,500;
4) Made $1,500 cash distribution to the owners;
5) Purchased a plot of land on June 1, 20X8, cost $5,000; the land value
increased to $6,000 by December 31, 20X8;
6) On May 1, 20X8 borrowed $2,000 from a bank for 12 months and 10% interest
rate;
7) Received cash for the principal and interest due on the certificate
of deposit when it matured on October 1, 20X8.
Adjusting entries at the end of 20X8 accounting period:
8) Accrued interest expense for the bank note (Event No. 5 for 20X8).
Required:
a) Record the effects of each event on the accounting equation for 20X7
and 20X8;
b) Prepare the income statement, statement of changes in equity, balance
sheet, and statement of cash flows for 20X7 and 20X8.
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