Question

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	7,425	3/27	1,275
3/28	7,000	3/29	3,625
3/30	7,975	3/31	1,925

Accounts Receivable
Bal.	1,950
3/18	9,875	3/30	7,975

Supplies
Bal.	225
3/7	1,550

Office Equipment
3/2	18,000

Accounts Payable
3/27	1,275	Bal.	1,250
		3/7	1,550

Notes Payable
		3/2	18,000

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

Retained Earnings
		Bal.	1,425

Dividends
3/31	1,925

Fees Earned
		3/18	9,875
		3/25	7,425

Rent Expense
3/3	2,300

Wages Expense
3/29	3,625

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.		$
Paid rent for April.		$
Purchased supplies on account.		$
Recorded fees earned on account.		$
Received cash for fees earned.		$
Paid creditors on account.		$
KL Company Inc. issued additional shares of common stock in exchange for cash.		$
Paid wages.		$
Received cash from customers on account.		$
KL Company Inc. paid dividends to its stockholders.		$

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	25,875
Accounts Receivable		3,850
Supplies	1,775
Office Equipment	18,000
Accounts Payable	1,525
Notes Payable		18,000
Common Stock		14,500
Retained Earnings	1,425
Dividends		1,925
Fees Earned		9,875
Rent Expense	3,200
Wages Expense		3,625
	51,800	51,775

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

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
$	=	$	+	$

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.

Answer 1

Transactions							Date	Amount	Account to Debit	Account to Credit
Purchased equipment, giving a note payable for the purchase price.							3/2.	18000	Office Equipment	Notes payable
Paid rent for April.							3/3.	2300	Rent Expense	Cash
Purchased supplies on account.							3/7.	1550	Supplies	Accounts Payable
Recorded fees earned on account.							3/18.	9875	Accounts Receivable	Fees Earned
Received cash for fees earned.							3/25.	7425	Cash	Fees Earned
Paid creditors on account.							3/27.	1275	Accounts Payable	Cash
KL Company Inc. issued additional shares of common stock in exchange for cash.							3/28.	7000	Cash	Common Stock
Paid wages.							3/29.	3625	Wages Expense	Cash
Received cash from customers on account.							3/30.	7975	Cash	Accounts Receivable
KL Company Inc. paid dividends to its stockholders.							3/31.	1925	Dividends	Cash

KL Company Inc.
Unadjusted Trial Balance
March 31, 20Y3
Account Title		Debit Balances	Credit Balances
Cash		21,275
Accounts Receivable		3,850
Supplies		1,775
Office Equipment		18,000
Accounts Payable			1,525
Notes Payable			18,000
Common Stock			14,500
Retained Earnings			1,425
Dividends		1,925
Fees Earned			17,300
Rent Expense		2,300
Wages Expense		3,625
Totals		52,750	52,750

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

X

X

Incorrectly reported as a credit

X

X

X

X

Balance computed incorrectly

X

Assets:
		$
Cash		21,275
Accounts Receivable		3,850
Supplies		1,775
Office Equipment		18,000
Total		44,900
Liabilities:
		$
Accounts Payable		1,525
Notes Payable		18,000
Total		19,525
Stockholders' Equity:
		$
Common Stock		14,500
Retained Earnings		1,425
Dividends		-1,925
Fees Earned		17,300
Rent Expense		-2,300
Wages Expense		-3,625
Total		25,375
Assets=Liabilities+Stockholder's equity
44900=19525+25375

	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
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