Types of Events

For each of the following events, identify whether it is an external event that would be recorded as a transaction (E), an internal event that would be recorded as a transaction (I), or not recorded (NR).

1. A vendor for a company's supplies is paid an amount owed on account.

2. A customer pays its open account.

3. A new chief executive officer is hired.

4. The biweekly payroll is paid.

5. Depreciation on equipment is recognized.

6. A new advertising agency is hired to develop a series of newspaper ads for the company.

7. The advertising bill for the first month is paid.

8. The accountant determines the federal income taxes owed based on the income earned during the period.

Exercise 3-3 The Effect of Transactions on the Accounting Equation

 For each of the following transactions, indicate whether it increases (I), decreases (D), or has no effect (NE) on the total dollar amount of each of the elements of the accounting equation.

 Transactions Assets ¼ Liabilities þ Stockholders' Equity

 Example: Common stock is issued in exchange for cash. I NE I

 1. Equipment is purchased for cash.

 2. Services are provided to customers on account.

 3. Services are provided to customers in exchange for cash.

 4. An account payable is paid off.

 5. Cash is collected on an account receivable.

 6. Buildings are purchased in exchange for a three-year note payable.

 7. Advertising bill for the month is paid.

 8. Dividends are paid to stockholders.

 9. Land is acquired by issuing shares of stock to the owner of the land.

Problem 3-2 Transaction Analysis and Financial Statements

 Just Rolling Along Inc. was organized on May 1 by two college students who recognized an

 opportunity to make money while spending their days at a beach along Lake Michigan. The two

 entrepreneurs plan to rent bicycles and in-line skates to weekend visitors to the lakefront. The

 following transactions occurred during the first month of operations:

 May 1: Received contribution of $9,000 from each of the two principal owners of the new

 business in exchange for shares of stock.

 May 1: Purchased ten bicycles for $300 each on an open account. The company has 30 days

 to pay for the bicycles.

 May 5: Registered as a vendor with the city and paid the $15 monthly fee.

 May 9: Purchased 20 pairs of in-line skates at $125 per pair, 20 helmets at $50 each, and 20

 sets of protective gear (knee and elbow pads and wrist guards) at $45 per set for cash.

 May 10: Purchased $100 in miscellaneous supplies on account. The company has 30 days to

 pay for the supplies.

 May 15: Paid $125 bill from local radio station for advertising for the last two weeks of May.

 May 17: Customers rented in-line skates and bicycles for cash of $1,800.

 May 24: Billed the local park district $1,200 for in-line skating lessons provided to

 neighborhood children. The park district is to pay one-half of the bill within five

 working days and the rest within 30 days.

 May 29: Received 50% of the amount billed to the park district.

 May 30: Customers rented in-line skates and bicycles for cash of $3,000.

 May 30: Paid wages of $160 to a friend who helped over the weekend.

 May 31: Paid the balance due on the bicycles.

 Required

 1. Prepare a table to summarize the preceding transactions as they affect the accounting equation. Use the format in Exhibit 3-1. Identify each transaction with the date.

 2. Prepare an income statement for the month of May.

 3. Prepare a classified balance sheet at May 31.

 4. Why do you think the two college students decided to incorporate their business rather than operate it as a partnership?