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	7,500	3/27	1,200
3/28	6,000	3/29	3,575
3/30	7,825	3/31	1,875

Accounts Receivable
Bal.	1,950
3/18	9,875	3/30	7,825

Supplies
Bal.	225
3/7	1,500

Office Equipment
3/2	17,000

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

Notes Payable
		3/2	17,000

Common Stock
		Bal.	7,500
		3/28	6,000

Retained Earnings
		Bal.	1,425

Dividends
3/31	1,875

Fees Earned
		3/18	9,875
		3/25	7,500

Rent Expense
3/3	2,300

Wages Expense
3/29	3,575

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.	3/2	$	Office Equipment	Notes Payable
Paid rent for April.	3/3	$	Rent Expense	Cash
Purchased supplies on account.	3/7	$	Supplies	Accounts Payable
Recorded fees earned on account.	3/18	$	Accounts Receivable	Fees Earned
Received cash for fees earned.	3/25	$	Cash	Fees Earned
Paid creditors on account.	3/27	$	Accounts Payable	Cash
KL Company Inc. issued additional shares of common stock in exchange for cash.	3/28	$	Cash	Common Stock
Paid wages.	3/29	$	Wages Expense	Cash
Received cash from customers on account.	3/30	$	Cash	Accounts Receivable
KL Company Inc. paid dividends to its stockholders.	3/31	$	Dividends	Cash

Feedback

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	24,975
Accounts Receivable		4,000
Supplies	1,725
Office Equipment	17,000
Accounts Payable	1,550
Notes Payable		17,000
Common Stock		13,500
Retained Earnings	1,425
Dividends		1,875
Fees Earned		9,875
Rent Expense	3,200
Wages Expense		3,575
	49,875	49,825

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
Accounts Receivable
Supplies
Office Equipment
Accounts Payable
Notes Payable
Common Stock
Retained Earnings
Dividends
Fees Earned
Rent Expense
Wages Expense

Feedback

Compute the account balances in the T accounts first.

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

Feedback

To determine which accounts were incorrectly reported as a debit or credit, think about the normal balance of an account as well as computing the account balance in the T account.

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
$	=	$	+	$

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.