39 CHAPTER 2 ANALYZING TRANSACTIONS CLASS DISCUSSION QUESTIONS 1. An account is a form designed to record changes in a particular asset, liability, stock-holders’ equity, revenue, or expense. A ledger is a group of related accounts. 2. The terms debit and credit may signify either an increase or decrease, depending upon the nature of the account. For example, deb-its signify an increase in asset, expense, and dividends accounts but a decrease in liabil-ity, capital stock, retained earnings, and revenue accounts. 3. Creditors and owners both have rights or claims to assets as indicated by the account-ing equation, Assets = Liabilities + Stock-holders’ Equity. Therefore, the same rules of debit and credit apply to both liabilities and stockholders’ equity. 4. a. Decrease in retained earnings b. Increase in expense 5. a. Increase in retained earnings b. Increase in revenue 6. a. Assuming no errors have occurred, the credit balance in the cash account re-sulted from drawing checks for $3,000 in excess of the amount of cash on de-posit. b. The $3,000 credit balance in the cash account as of August 31 is a liability owed to the bank. It is usually referred to as an "overdraft" and should be classi-fied on the balance sheet as a liability. 7. a. The revenue was earned in May. b. (1) Debit Accounts Receivable and credit Fees Earned or another ap-propriately titled revenue account in May. (2) Debit Cash and credit Accounts Receivable in June. 8. The trial balance is a proof of the equality of the debits and the credits in the ledger. 9. No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failure to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong ac-count. 10. The listing of $18,590 is a transposition; the listing of $720 is a slide. 11. a. No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance. b. Yes. The trial balance would not bal-ance. The error would cause the credit total of the trial balance to exceed the debit total by $270. 12. a. The equality of the trial balance would not be affected. b. On the income statement, total operating expenses (salary expense) would be overstated by $7,500, and net income would be understated by $7,500. On the retained earnings statement, the begin-ning and ending retained earnings would be correct. However, net income and dividends would be understated by $7,500. These understatements offset one another, and thus, ending retained earnings is correct. The balance sheet is not affected by the error. 13. a. The equality of the trial balance would not be affected. b. On the income statement, revenues (fees earned) would be overstated by $25,000, and net income would be over-stated by $25,000. On the retained earn-ings statement, the beginning retained earnings would be correct. However, net income and ending retained earnings would be overstated by $25,000. The balance sheet total assets is correct. However, liabilities (notes payable) is understated by $25,000, and retained earnings is overstated by $25,000. The understatement of liabilities is offset by the overstatement of retained earnings, and thus, total liabilities and stockhold-ers’ equity is correct. 14. The preferred procedure is to journalize and post a correcting entry debiting Accounts Receivable and crediting Accounts Payable.40 15. a. From the viewpoint of Kennon Storage, the balance of the checking account represents an asset. b. From the viewpoint of Livingston Sav-ings Bank, the balance of the checking account represents a liability.41 EXERCISES Ex. 2–1 Balance Sheet Accounts Income Statement Accounts Assets Flight Equipment Purchase Deposits for Flight Equipment* Spare Parts and Supplies Liabilities Accounts Payable Air Traffic Liability** Owners’ (Stockholders’) Equity None Revenue Cargo and Mail Revenue Passenger Revenue Expenses Aircraft Fuel Expense Commissions*** Landing Fees**** * Advance payments on aircraft purchases ** Passenger ticket sales not yet recognized as revenue *** Commissions paid to travel agents **** Fees paid to airports for landing rights Ex. 2–2 Account Account Number Accounts Payable 21 Accounts Receivable 12 Capital Stock 31 Cash 11 Dividends 33 Fees Earned 41 Land 13 Miscellaneous Expense 53 Supplies Expense 52 Wages Expense 5142 Ex. 2–5 (1) Cash..................................................................... 40,000 Capital Stock.................................................. 40,000 (2) Supplies............................................................... 1,800 Cash................................................................ 1,800 (3) Equipment ........................................................... 24,000 Accounts Payable.......................................... 15,000 Cash................................................................ 9,000 (4) Operating Expenses ........................................... 3,050 Cash................................................................ 3,050 (5) Accounts Receivable.......................................... 12,000 Service Revenue............................................ 12,000 (6) Accounts Payable ............................................... 7,500 Cash................................................................ 7,500 (7) Cash..................................................................... 9,500 Accounts Receivable .................................... 9,500 (8) Dividends............................................................. 5,000 Cash................................................................ 5,000 (9) Operating Expenses ........................................... 1,050 Supplies