Posted: July 19th, 2016

Identification of Events With Source Documents?

Expert Consulting Services Inc. was organized on March 1, 2012, by two former college roommates. The corporation provides computer consulting services to small businesses. The following transactions occurred during the first month of operations.
March 2: Received contributions of $20,000 from each of the two principal owners of the new business in exchange for shares of stock.
March 7: Signed a two-year promissory note at the bank and received cash of $15,000. Interest, along with the $15,000, will be repaid at the end of the two years.
March 12: Purchased $700 in miscellaneous supplies on account. The company has 30 days to pay for the supplies.
March 19: Billed a client $4,000 for services rendered by Expert in helping to install a new computer system. The client is to pay 25% of the bill upon its receipt and the remaining balance within 30 days.
March 20: Paid $1,300 bill from the local newspaper for advertising for the month of March.
March 22: Received 25% of the amount billed to the client on March 19.
March 26: Received cash of $2,800 for services provided in assisting a client in selecting software for its computer.
March 29: Purchased a computer system for $8,000 in cash.
March 30: Paid $3,300 of salaries and wages for March.
March 31: Received and paid $1,400 in gas, electric, and water bills.
1. Prepare a table to summarize the preceding transactions as they affect the accounting equation. Identify each transaction with the date.

PROBLEM 3-5: Identification of Events With Source Documents

Many events are linked to a source document. Following is a list of events that occurred in an entity.

a. Paid a one-year insurance policy
b. Paid employee payroll
c. Provided services to a customer on account
d. Identified supplies in the storeroom destroyed by fire
e. Received payment of bills from customers
f. Purchased land for future expansion
g. Calculated Taxes Due
h. Entered into a car lease agreement and paid the tax, title, and license.

For each item, indicate if the event should be recorded. Identify one or more source documents generated from the event; which source document would be used to record the event when it produces more than one source document; and identify the information that is most useful in recoding the event in the accounts.

EXERCISE 4-26: Revenue Recognition, Cash and Accrual Basis

Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $366 each. The club expects to sell 100 additional three-year memberships for $900 each over each of the next two years. Membership fees are paid when clients sign-up. The club’s bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3. Cash-basis income statements: