M1 CNOW Critical Thinking Problems

1. MP.01.01.ALGO
2. MP.02.01.ALGO

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2. Mastery Problem: Analyzing Transactions

   KL Company Inc.

   In February, Katie Long formed KL Company Inc. Transactions for the month of March have been posted to the T accounts. An intern has prepared a trial balance from the T accounts, but there seem to be some errors.

   T accounts

   Cash
   Bal.	8,000	3/3	2,300
   3/25	7,800	3/27	1,200
   3/28	7,000	3/29	3,425
   3/30	7,825	3/31	1,900

   Accounts Receivable
   Bal.	1,950
   3/18	9,800	3/30	7,825

   Supplies
   Bal.	225
   3/7	1,500

   Office Equipment
   3/2	18,000

   Accounts Payable
   3/27	1,200	Bal.	1,250
   		3/7	1,500

   Notes Payable
   		3/2	18,000

   Common Stock
   		Bal.	7,500
   		3/28	7,000

   Retained Earnings
   		Bal.	1,425

   Dividends
   3/31	1,900

   Fees Earned
   		3/18	9,800
   		3/25	7,800

   Rent Expense
   3/3	2,300

   Wages Expense
   3/29	3,425

   Required:

   Transactions

   Descriptions of the transactions for the month of March are provided in the following table. Each of the transactions that follow has been posted to the T accounts. Referring to the T accounts, select the date on which each transaction occurred, enter the amount of the transaction, and select the account to debit and credit.

   Transaction	Date	Amount	Debit	Credit
   Purchased equipment, giving a note payable for the purchase price.	3/3	$fill in the blank 642b62fdcfbafd7_2
   Paid rent for April.		$fill in the blank 642b62fdcfbafd7_6
   Purchased supplies on account.		$fill in the blank 642b62fdcfbafd7_10
   Recorded fees earned on account.		$fill in the blank 642b62fdcfbafd7_14
   Received cash for fees earned.		$fill in the blank 642b62fdcfbafd7_18
   Paid creditors on account.		$fill in the blank 642b62fdcfbafd7_22
   KL Company Inc. issued additional shares of common stock in exchange for cash.		$fill in the blank 642b62fdcfbafd7_26
   Paid wages.		$fill in the blank 642b62fdcfbafd7_30
   Received cash from customers on account.		$fill in the blank 642b62fdcfbafd7_34
   KL Company Inc. paid dividends to its stockholders.		$fill in the blank 642b62fdcfbafd7_38

   Trial Balance: Unequal Totals

   The intern has prepared the following trial balance for the month of March.

   KL Company Inc. Unadjusted Trial Balance March 31, 20Y3
   Account Title	Debit Balances	Credit Balances
   Cash	26,400
   Accounts Receivable		3,925
   Supplies	1,725
   Office Equipment	18,000
   Accounts Payable	1,550
   Notes Payable		18,000
   Common Stock		14,500
   Retained Earnings	1,425
   Dividends		1,900
   Fees Earned		9,800
   Rent Expense	3,200
   Wages Expense		3,425
   	52,300	51,550

   Trial Balance: Correct

   The Trial Balance: Unequal Totals was prepared by the intern. The intern is puzzled by the unequal totals. Prepare a corrected trial balance. If an amount box does not require an entry, leave it blank.

   KL Company Inc. Unadjusted Trial Balance March 31, 20Y3
   Account Title	Debit Balances	Credit Balances
   Cash	fill in the blank 32ba4804700901b_1	fill in the blank 32ba4804700901b_2
   Accounts Receivable	fill in the blank 32ba4804700901b_3	fill in the blank 32ba4804700901b_4
   Supplies	fill in the blank 32ba4804700901b_5	fill in the blank 32ba4804700901b_6
   Office Equipment	fill in the blank 32ba4804700901b_7	fill in the blank 32ba4804700901b_8
   Accounts Payable	fill in the blank 32ba4804700901b_9	fill in the blank 32ba4804700901b_10
   Notes Payable	fill in the blank 32ba4804700901b_11	fill in the blank 32ba4804700901b_12
   Common Stock	fill in the blank 32ba4804700901b_13	fill in the blank 32ba4804700901b_14
   Retained Earnings	fill in the blank 32ba4804700901b_15	fill in the blank 32ba4804700901b_16
   Dividends	fill in the blank 32ba4804700901b_17	fill in the blank 32ba4804700901b_18
   Fees Earned	fill in the blank 32ba4804700901b_19	fill in the blank 32ba4804700901b_20
   Rent Expense	fill in the blank 32ba4804700901b_21	fill in the blank 32ba4804700901b_22
   Wages Expense	fill in the blank 32ba4804700901b_23	fill in the blank 32ba4804700901b_24
   	fill in the blank 32ba4804700901b_25	fill in the blank 32ba4804700901b_26

   Errors on Trial Balance

   Compare the trial balance prepared by the intern (Trial Balance: Unequal Totals) to the trial balance that you prepared (Trial Balance: Correct). In the following table, select the accounts for each type of error. Not all accounts contain errors.

   Error Type

   Cash

   Accounts Receivable

   Supplies

   Office Equipment

   Accounts Payable

   Notes Payable

   Common Stock

   Retained Earnings

   Dividends

   Fees Earned

   Rent Expense

   Wages Expense

   Transposition

   Incorrectly reported as a debit

   Incorrectly reported as a credit

   Balance computed incorrectly

   Accounting Equation

   The intern is puzzled and asks "Are you sure the accounting equation is still in balance?" Using the corrected trial balance you prepared, prove that the accounting equation is in balance.

   Assets	=	Liabilities	+	Stockholders' Equity
   $fill in the blank 8a554bfd0072fa0_1	=	$fill in the blank 8a554bfd0072fa0_2	+	$fill in the blank 8a554bfd0072fa0_3

   Still puzzled, the intern asks "Why do none of the amounts in the accounting equation equal the totals on the trial balance?"

   a.	The accounts with debit balances are not all classified in the same element of the accounting equation. For example, not all accounts with debit balances are assets.
   b.	This is because the revenue and expense accounts are part of the stockholders equity element. The accounts with debit balances should be part of the total assets.
   c.	You point out the total of the assets, liabilities and stockholders equity is equal to the sum of the debit and credit totals on the trial balance.
   d.	The accounts with credit balances are not all classified in the same element of the accounting equation. For example, not all accounts with credit balances are liabilities.
   e.	The accounts that make up the total for stockholders equity have a mix of debit and credit balances.