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    Recording Transactions and their Effects on Financial Statements

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    Mikor has an account payable of $7,700 due to Smiley, Inc., one of its suppliers. The amount was due to be paid on October 15, 2008. Mikor only had enough cash on hand then to pay $1,700 of the amount due, so Mikor's treasurer called Smiley's treasurer and agreed to sign a note payable for the balance. The note was dated October 15, 2008, had an interest rate of 8% per annum, and was payable with interest on December 31, 2008.

    Use the horizontal model, or write the journal entry, to show the effect of:

    a. The October 15, 2008 payment of $1,700 and the creation of a note payable for the balance owed.

    b. The October 31, 2008 accrual of interest expense for the month of October.

    c. The December 31, 2008 payment of the note and all of the interest due. Interest for November and December had not been accrued.

    2. On January 10, 2008, Jeanco paid $2,100 rent for a storage facility for the period from January 10 through May 31. The rent charge is $450 per month.

    Use the horizontal model, or write the journal entry, to show the effect of:

    a. The January 10, 2008 rent payment assuming that the disbursement was recorded as an expense.

    b. The January 31, 2008 adjustment recorded to show the appropriate amount of expense in the income statement of Jeanco for the month of January.

    c. Show an alternative way of recording the disbursement of $2,100 on January 10, 2008.

    d. Record the adjustment that would be appropriate at January 31, 2008 if the disbursement had been recorded as in c.

    e. What is the effect of the difference between the two methods of recording these items (a and b versus c and d) on the:

    1. Income statement for the month of January?

    2. Balance sheet at January 31st?

    3. A bookkeeper prepared the year-end financial statements of Giftwrap, Inc. The income statement showed net income of $3,900, and the balance sheet showed beginning retained earnings of $39,200. No dividends were declared or paid during the year. The firm's accountant reviewed the bookkeeper's work and determined that adjusting entries should be made that would increase revenues by $2,200, and decrease expenses by $900.

    a. What will be the amount of net income after the above adjustments are recorded?

    b. What was the ending retained earnings balance on the balance sheet prepared by the bookkeeper?

    c. What is the correct ending balance in retained earnings to be reported on the balance sheet?

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    Solution Summary

    Recording transactions and their effects on financial statements are determined.