PR 1-1B Transactions

Amy Austin established an insurance agency on March 1 of the current year and completed the following transactions during March:

a. Opened a business bank account with a deposit of $50,000 in exchange for common stock.

b. Purchased supplies on account, $4,000.

c. Paid creditors on account, $2,300.

d. Received cash from fees earned on insurance commissions, $13,800.

e. Paid rent on office and equipment for the month, $5,000.

f. Paid automobile expenses for month, $1,150, and miscellaneous expenses, $300.

g. Paid office salaries, $2,500.

h. Determined that the cost of supplies on hand was $2,700; therefore, the cost of supplies used was $1,300.

i. Billed insurance companies for sales commissions earned, $12,500.

j. Paid dividends, $3,900.

Instructions

1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings:

Assets 5Liabilities1 Stockholders’ Equity Accounts Payable + Common Stock – Dividends + Fees Earned –Rent  Expense –Salaries Expense –Supplies Expense – Auto Expense – Misc. Expense

2.  Briefly explain whyissuing common stock and revenues increased stockholders’ equity, while dividends and expenses decreased stockholders’ equity.

3. Determine the net income for March.

4. How much did March’s transactions increase or decrease retained earnings?

Answer:

1. Assets = Liabilities + Cash Accts. + Rec. +   Supplies   = Accts. Payable   + (a)  + 50,000 + 50,000 (b) + 4,000 + 4,000 Bal. 50,000 4,000 4,000 50,000 (c)  – 2,300 – 2,300 Bal. 47,700 4,000 1,700 50,000 (d)  + 13,800 + 13,800 Bal. 61,500 4,000 1,700 50,000 13,800 (e)  – 5,000 – 5,000 Bal. 56,500 4,000 1,700 50,000 13,800 – 5,000 (f)   – 1,450 – 1,150 –   300 Bal. 55,050 4,000 1,700 50,000 13,800 – 5,000 – 1,150 –   300 (g)  – 2,500 – 2,500 Bal. 52,550 4,000 1,700 50,000 13,800 – 5,000 – 2,500 – 1,150 –   300 (h) – 1,300 – 1,300 Bal. 52,550 2,700 1,700 50,000 13,800 – 5,000 – 2,500 – 1,300 – 1,150 –   300 (i) + 12,500 + 12,500 Bal. 52,550 12,500 2,700 1,700 50,000 26,300 – 5,000 – 2,500 – 1,300 – 1,150 –   300 (j)   – 3,900 – 3,900 Bal. 48,650 12,500 2,700 1,700 50,000 – 3,900 26,300 – 5,000 – 2,500 – 1,300 – 1,150 –   300 2. Stockholders’ equity is the right of stockholders (owners) to the assets of the business. These rights are increased by issuing common stock and revenues and decreased by dividends and expenses. 3. $16,050 ($26,300 – $5,000 – $2,500 – $1,300 – $1,150 – $300) 4. March’s transactions increased retained earnings by $12,150 ($16,050 – $3,900), which is the excess of March’s net income of $16,050 over dividends of $3,900.